Political Economy of War

THE POLITICAL ECONOMY OF WAR
MACMILLAN AND
LONDON
CO., LIMITED
BOMBAY CALCUTTA MELBOURNE
MADRAS
THE MACMILLAN COMPANY

NEW YORK
DALLAS
BOSTON CHICAGO SAN FRANCISCO
THE MACMILLAN
CO. OF TORONTO
CANADA,
LTD.
THE
POLITICAL
ECONOMY
OF
WAR
BY
A.
C.
PIGOU, M.A.
PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF CAMBRIDGE AUTHOR OF "THE ECONOMICS OF WELFARE," ETC.
MACMILLAN AND
ST.
CO.,
LIMITED
MARTIN'S STREET, LONDON

1921
COPYRIGHT
PREFACE
IN some of the chapters of
this
book use has been
made
of relevant parts of
my
Economics of Welfare
and of other publications, including a memorandum

prepared for the International Financial Conference
at Brussels
and a pamphlet entitled A Capital Levy and a Levy on War Wealth. I desire to thank Messrs. Dent for kindly allowing me to incorporate
some passages from
my
book, The Economy and
Finance of the War, published by them in 1916.
A. C. P.
June 1921.
470521
CONTENTS
INTRODUCTION
...
CHAPTER
BY
CHAPTER
PAGE
i
THE SHADOW CAST
WAR
....
III
.
II
CHAPTER
ECONOMIC CAUSES OF
WAR
.16
CHAPTER
RESOURCES AVAILABLE FOR
IV
WAR
...
30
CHAPTER V
REAL AND MONEY
WAR
COSTS AND EXPENDITURE

vii
45
viii
POLITICAL ECONOMY OF
WAR
CHAPTER
VI
PAGE
.
THE CHOICE AMONG PERSONAL ECONOMIES
53
CHAPTER
GOVERNMENT COMMANDEERING
VII
....
VIII
63
CHAPTER
TAXES VERSUS LOANS
71
CHAPTER
IX
.
THE TECHNIQUE OF VOLUNTARY LOANS
86
CHAPTER X
FINANCE BY BANK CREDITS
....
XI
. .
93
PRICE CONTROL
....
CHAPTER
XII
CHAPTER
.112
RATIONING OF CONSUMERS
136
CONTENTS
ix
CHAPTER
PRIORITIES
XIII
PAGE
.
AND THE RATIONING OF FIRMS
150
CHAPTER XIV
SUBSIDIES
155
CHAPTER XV
THE AFTERMATH
IN
CURRENCY AND EXCHANGES
161
CHAPTER XVI
THE CONTROL OF IMPORTS AND FOREIGN
MENTS
. .
INVEST.
.182
CHAPTER
XVII
.
THE AFTERMATH OF INTERNAL DEBT
.189
CHAPTER
THE AFTERMATH
XVIII
.
OF GOVERNMENT CONTROL
233
INDEX
239
CHAPTER
INTRODUCTION
FROM the time of Adam Smith British economists have studied the working of economic processes in normal conditions. They have watched a nation
of
many
million
persons regularly clothed, fed.
housed and amused, not as the result of some tremendous piece of deliberate organisation, still
less
by the separate
effort of
directly furnishing his
complex round the motive of private money profit. This scheme of things has, of course, grave flaws it involves great waste it has meant for very many human beings weariness, discontent, hunger and But the system works To probe the pain.
ordinarily
built
;
!
each person or family needs, but by an extrasystem of mutual exchange
own
mystery of that miracle, to understand how it works, what exactly is the mechanism of it, and how the human forces behind the mechanism guide and control it, is a task to which able men have devoted their lives. Their hope has been that, by carrying out well and truly this task of positive this economic anatomy and physiology analysis i B
POLITICAL,. ECONOMY
OF WAR
CH.
they might help other men, better trained than themselves for the practical work of government and administration, to fashion remedies or palliatives for the
is
still
many
unfinished.
it is
subdivisions
evils they descry. This task In one or other of its many being pressed forward continually
by eager
change.
There has, however, been a In the four years that ended on November n, 1918, the unconscious processes of normal life were abandoned, and Europe swung reeling to the
students.
conscious agony of war. It is no purpose of mine to paint the unimagined horror of those fearful
years.
That work is for the historian and the poet For him the clear heart, the human of a later age. the For the pity, the grace, the tears sympathy, economist these years have framed a task much
!
humbler, but one, nevertheless, which it is right that he should try to accomplish. They have set
out in strong
relief,
settled order, the strained
against the cool rhythm of a and stressed economy
of world-shattering war. What was the anatomy and physiology of that economy ? How did the
structures that
had grown up in another environment and had adapted themselves to other ends respond to the new calls made upon them ? To
the Political
is
Economy we have read

a
hitherto there
Political
companion volume, the Economy of War. Some pages of this I
needed
shall try
to write, partly in general terms, partly with more special reference to the experience of this country.
If I succeed in any measure, some complex issues should be resolved and some confusions cleared
INTRODUCTION
away.
civilised
on what,
Perhaps, too, a little light may be thrown if the human spirit is to remain sane and
society to endure, is the only political that will ever again have relevance to
economy
practical affairs, the Political
Economy of permanent and assured peace among the great nations of the
world.
CHAPTER
II
THE SHADOW CAST BY WAR
Economy of War has two preliminary chapters. One of these deals with the shadow the reflection in the economic structure
i.
THE
Political
and policy of normal times

itself
;
that
war
casts before
the
other with the influence which the
economic structure and policy of normal times exercises in making the outbreak of war more or Let us begin with the shadow that less probable. war throws on peace. 2. First and most obviously, the menace of possible war makes necessary the upkeep of armies, This innavies, air forces and munition works. volves annually the withdrawal from ordinary productive industry of a large number of men above
the average level of physique, of much intelligence, of organising and inventive power and of many
ingenious
force,
it
machines.
Where
conscription
is
in
may be urged in mitigation of this that one or two years' service with the forces provides some measure of general training that promotes and also that efficiency and industry afterwards
;
CH.
ii

made
the arrangements sometimes
for reducing the
service period for young men who attain a certain standard in examinations stimulates them to make
the best use of their schooldays. These pleas are urged in rebuttal of the charge that military service
is,
from the
When
industrial point of view, pure waste. a voluntary standing army is relied on, and,
instead of the bulk of the population passing through the military machine for a year or so, a relatively
small
number
of
men
are held to
it
for the
main
part of their lives, they are, plainly, of little force. Moreover, even under the short service system an
important
It may distinction must be drawn. that held be army training from, say, reasonably
19 to 21 years of age makes
men more
fitted for
industry than they were at 19. But this is a very different thing from holding that it makes them more fitted for industry than they would have been at 21 had the two preceding years been devoted to
employment
service
may make
in industry. Two years of military a man a better carpenter than he
was before the two years started, but hardly than he would have been after two years of carpentering.
result
Thus, whatever benefit to future efficiency may from military training is probably more than
loss of the
outweighed by the
that
corresponding benefit
industrial
would otherwise have resulted from
It cannot, therefore, properly be set experience. against the direct loss of product that the withdrawal
of people from two years of industrial work involves. 3. When service in the army, navy and munition
works
is
voluntary, so that the pay for sailors and
must correspond roughly
WAR
CH.
soldiers
to that accorded
of similar capacity in civil life, the proportion of the country's real resources annually withheld from production on account of the fear
to
' '
men
of war is roughly equivalent to the proportion that the expenditure of the department entrusted with national defence bears to the aggregate money
income of the nation. Of course, this is a very different thing from the money income of the When the Brussels Financial Congovernment. ference of 1920 stated that, on an average of all " the countries brought under review, some 20 per
to the
cent of the national expenditure is still being devoted maintenance of armaments and to preparations for war,"
1
mean that 20 per cent of income the various countries money was so devoted. National expenditure was used to mean expenditure of national governments, and did not include the expenditure of people on their
this did not
of the net
otherwise than through governfigure required to give the proportion of aggregate real income or productive power that
private needs
made
ment.
is
The
war would, than 20 per cent. With existing statistics it cannot, even for this country, be determined accurately. Before the war, how-
annually used
up
in preparations for
less
therefore, be
much
ever, the money income of the United Kingdom as a whole (not the revenue of the government)
used to be put by statisticians at something between 2000 and 2400 millions. The expenditure on the army and navy in 1913 was a little under 80,000,000.
1
Report, p. ii.
ii
The required figure would, therefore, seem to be between 3 and 4 per cent, that is to say, the equivalent of about a fortnight's work of the brain workers, hand workers and mechanical equipment of the country every year. For France and Germany such pre-war statistics as exist suggest that the proportion in terms of money was about the same, but it must be remembered that in conscript countries the pay given to soldiers is likely to be lower relatively to the market value of their services than it is in a country in which military service is
voluntary.
4. At first sight such a figure as 4 per cent may seem surprisingly small. It must be remembered, however, that the income on which it is based is total income, and not, in any sense, surplus income. The average pre-war income per family of the
10 million householders (of \\ persons) in the United Kingdom was probably not more than 230. This does not leave much margin for national luxuries. As Dr. Bowley has said, " The wealth of the country, however divided, was insufficient before the war for a general high standard there is nothing as yet to show that it will be greater in the future." * In the light of this fact the withdrawal of 4 per cent from the total income assumes
:
It is equivalent to a much reduction of the surplus income larger percentage that is left over after the absolutely indispensable needs of individual life apart altogether from any
more
serious aspect.
'
need there may be for new accumulations of capital

1
The Division of
the Product of Industry, p. 58.
WAR
CH.
and of government administration have been satisfied. Suppose that in the United Kingdom it was 15 per
cent of this surplus income. In France, Germany and Italy, where the income per head is substantially less
than in the United
Kingdom and the
proportion of it absorbed by essential needs higher, the figures corresponding to this 15 per cent would
certainly
be
much
bigger.
The shadow
of
war
has never involved for this country so heavy a burden of real sacrifice as it has thrown on continental States.
5. It
is
of
armed
not, however, only in the direct cost forces that the shadow of war makes its
influence
felt. The history of the United Kingdom affords examples of opulence having to be sacrificed to indirect preparations for the recruitment and
equipping of these forces. Thus, the navigation laws, which excluded foreign merchant ships from our coastal trade, had the double object of training up in peace time seamen who could be used in war
and of securing a
vessels
large supply of British merchant convertible at need into fighting ships.
The
first
of these objects even
now
stands behind
demands for limiting the employment of foreigners on British merchant ships and for imposing disabilities on alien pilots. With the divorce in structure between war vessels and ordinary ships that came about as a result of modern invention, the importance of merchant ships as potential war
ships diminished though the Admiralty still gave a subsidy to certain fast liners on condition that
;
they should be so built as to be capable of con-
ii

auxiliary
cruisers.
version into
With the Great
ships, in their proper function of merchant ships, have been shown to be an essential element in national defence, and there can be little
War merchant
doubt that, if the motive of economic profit failed to provide us with a large mercantile marine, the fear of war would compel the government to interfere
by bounties or otherwise
in order to divert
resources from other industries into the shipping

industry.
The shadow of war, which is thus liable to be thrown upon sea transport, affects land transport also. Even in the United Kingdom there is a
example of this. The project of a tunnel beneath the English Channel, which everybody agreed was economically very desirable, was for many years vetoed upon strategic grounds. On
striking
the Continent, and particularly in Prussia, military considerations played a larger part, and the course
to be followed
lines
by a number of important railway was determined with regard to the need of
throwing masses of troops quickly to the frontier. It is probable that transport through the air will also be twisted somewhat from a normal development by the requirements of war. The law of the air can hardly fail to have regard to possibilities
of espionage over fortified places.
So
far
governments exercise control over the design of commercial aircraft, they will be tempted to think about the convertibility of these craft from goods So far as they carrying to the carrying of bombs. have a voice in preparing air routes and determining
as
io
WAR
CH.
the situation of aerodromes, they will not
and, indeed, they ought not to disregard facilities for quick concentration against a possible foe and the security of repair shops and manufacturing plant
from
hostile air attack.
impossible to say to what extent the sort of defence considerations that I have hinted
It is, of course,
at are likely to injure the
opulence of this or any its sea, land and air transport systems less efficient instruments of communication in normal times than they would
other particular country by rendering
have been
is,
if
war were
as
dead as duelling.
There
however, a strong presumption that any interference with the free play of economic forces, designed, not to make good some failure on the
part of those forces to promote economic welfare, but to forward a non-economic end, will, in one way or another, divert resources from more to less
somewhat
6.
productive channels, and so will make the country less well-off than it would have been if
the claims of defence had been silent.
We
have
now
to consider a matter
which
is
especially important to the United shadow that possible future war
Kingdom
throws
the
upon
The United Kingdom is normally agriculture. dependent for a large part of its food supplies upon
imports.
in
this
Some four-fifths
way.
of our wheat are obtained
arrangement has developed under the ordinary play of economic forces. It has been found that we can get far more wheat and other articles of food for a given amount of work of our men and machines if we get it indirectly in exchange
This
ii
and cotton goods than if we grow it for In a world of assured peace there would be very little ground for interfering with this arrangement. There are, of course, serious social disadvantages in what is called the depopulafor coal
ourselves.
tion of the countryside ; but it is perfectly possible so to arrange things that a large part of the population live in rural surroundings, even though they
are engaged in industrial, work. Where there is a

reliance
and not
risk
in agricultural,
of war,
however,
on imported food is dangerous, because of food may be cut off and, though, as imports recent experience has shown, it is practicable to add appreciably to the food output of the country
:
at short notice, it is
not practicable at short notice
to
make the United Kingdom independent, or anyConthing like independent, of imported food.
sequently, in a world liable to war, it is a vital issue whether we should rely for our food supplies
on normal economic processes or should sacrifice some of the advantages, which these processes give to us in peace, in order to provide an insurance against the risks of war. Some measure of insurance might be secured by holding persufficient, for manently great stores of wheat
example, to supply our needs
for
year
in
national granaries. The same grain would not, of course, be held in these granaries continuously. What
was wanted would be taken out
at
one end and new
supplies poured in at the other.
But the
same
amount, or, rather, not less than an agreed minimum amount, of grain would be held continuously. Plainly
12
WAR
CH.
an arrangement of this kind would be expensive, and plainly, too, it would only be effective against a short war. But, as a measure of partial insurance, some case can be made out for it. An alternative
method
is
for the government,
tees or duties
upon imports,
by bounties, guarandeliberately to divert
the productive powers of the country towards the development of agriculture instead of industry
measure to enable us to dispense, at with need, imports of food. There can be no doubt, however, that this policy, if carried far enough to be effective, would be extraordinarily Moreover, since an enormously enhanced costly.
in sufficient
agricultural output
would involve an enormously

;
increased need for fertilisers, it might easily, when put to the test, break down for fertilisers have
largely to be imported, liable to be cut off.
7.
and in war they would be
are to be considered certain inengaged in the manufacture of materials and instruments which would be urgently needed for munition-making if war broke out. The iron and
dustries
Next there
industry, the engineering industry, certain chemical industries, and the industries of iron-mining and coal-mining are of this kind. Yet again, other industries, though they do not themselves make things
steel
directly serviceable for
war purposes, yet use plant
that
it
would be
possible, at need, to adapt very
quickly for manufacturing such things. Thus, yards established for merchant shipbuilding can be turned over to make warships, and the plant of dye-works
to
make
explosives.
If a country relies
on foreign
ii
13
engineering work and foreign imports of iron ore, the cutting off of imports would greatly handicap In the it in maintaining its output of munitions.
same way,
if it
has no works that can be readily
adapted to making warships or explosives, it will be in a much weaker position for carrying on a war, should it suddenly find itself unable to import them from abroad, than it might have been. For these reasons, the fear of war may induce the government of a country, to which one or another of these industries is not naturally well suited, and
in which, therefore,
it
would
not, in the
normal
course of things, be well developed, to stimulate its growth by various artificial encouragements.
When
government does
this,
just as
when
it
protects agriculture on military grounds, it imposes on the nation a continuing economic loss, due to
the diversion of
resources into relatively una kind of insurance premium as productive channels, the risks of If the policy is carried war. against
its
enough to be effective, the costs are likely to be high and the real sacrifice involved large. 8. There remain key industries. Sometimes this term is loosely used to cover all industries that are important to the economic well-being of the
far
* '
country
as
to include, for example, such industries
engineering and textiles. It seems better, however, to keep the term for industries that really are key/ in the sense of being small and of relatively low value in themselves, but, nevertheless,
'
essential to enable large
and important industries
to work.
Examples of key industries in this sense
14
are
WAR
CH.
magneto making, without which motor-car production is paralysed, the dye industry, which is essential to the finishing of textile fabrics, and the optical glass industry, which is similarly essential
to
the finishing of many scientific instruments. Some industries of the key class are keys to munition-
making
industries, some to industries that have no direct relation to war, some to both kinds. Their
distinguishing characteristic is that the importance of their product is exceptionally large relatively
to
its
money
value.
That
is
to say, if
off
100,000
worth of key goods were cut
(values
being
calculated at the prices ruling before the cutting off took place), the country would suffer much
greater real loss than if an equal value of a nonkey article, of which normally about an equal value
is
consumed, were cut off for it would indirectly be prevented from using the special aptitudes of the men and machines trained to make the things to which the key goods are essential. It follows
;
that the case for stimulating home-production by bounties, guaranteed prices or protective duties, as
a defence against war risks, is much stronger as regards true key industries than as regards other
industries of equal money value. When the key article is a speciality of a single country likely to
become an enemy, and when,
therefore, the danger that the importation of it will be completely stopped in war is great, the case is stronger than it is
when
9.
there are several foreign sources of
manu-
facture.
What
has been said in the preceding para-
ii
15
graphs should have served to indicate the nature of the problems which the danger of war raises. It is not my purpose to set out or defend any conclusion on the political issue whether or not in existing circumstances one or another method of insurance against this or that kind of shortage in war ought to be adopted by this country. What insurance premium a prudent man will pay to safeguard himself against any evil depends on a
complex comparison of the effectiveness of the

insurance offered, of the chance that the evil he wishes to guard against will occur, and of the amount of the injury he will suffer if it does occur.
Such an
elaborate
issue can only be settled on the basis of and detailed study. Here we are con-
cerned with the point of principle only. In a world liable to war it may not only happen, but it may be wise, that a country should sacrifice something of opulence in normal times in order to protect itself against a shortage of food or other essential goods should war break out. If the shadow of war were removed, this sacrifice of opulence to defence would not be required.
CHAPTER
III
ECONOMIC CAUSES OF WAR

i.
PASS
now
to the second preliminary matter
distinguished on page 4, namely, the influence which the economic structure and policy of normal times exercises in making the outbreak of war This is a large subject on which likely or unlikely. there has been much discussion. What I shall say upon it here can only be brief and summary. 2. The immediate occasions of war are manifold " insult to the flag," the and, maybe, trivial an murder of an official personage, the rash act of some
panic-stricken commander of troops or warships, the falsification of a telegram by some astute diploBut these occasions are not the causes of matist.
war.
are the match to the powder magazine. fundamental causes are those that lie behind the assembling of the powder. In the last
They
The
real
analysis these are
two
in
number, the desire for
domination and the desire for gain. 3. The desire for domination for its own sake, apart from any economic advantages, it may confer, The is a real and effective motive for action.
16
CH. in
17
English schoolboy who asserts himself by bullying smaller boys, the German officer who bullies civilians, the white man in tropical countries who
from
exacts special marks of respect and subordination his inferiors/ all at bottom are displaying a
'
desire for domination.
There
is
no doubt
at
all
that the average Englishman or Frenchman does have this sort of desire ; and, moreover, feels that
gratified by the fact that he is a Great Power/ not of Holland or Switzerland or Spain. Before the war many Germans really desired their country to hold Europe in a thrall of fear, and thrilled to hear their country's sabre rattling behind its diplomacy. It does not
it
is
somehow
'
citizen of a
for the
happen, indeed, that modern nations go to war avowed purpose of discovering which is " the better man." But this element is certainly
present in their rivalry. Furthermore, the desire for domination makes nations extraordinarily unwilling to relax their hold on have come once to possess.'
*
any
territory they
They
are
'
humili-
ated/ outraged, dishonoured passes out from their yoke.
if
a subject population It is enough to name
Ireland, Egypt, India, the Philippines in the days of Spanish rule, the subject nationalities of Turkey before the war, Alsace-Lorraine before the war,
Finland, Poland
For continuing
to
hold these
places against their will, ruling powers have offered many reasons their duty to civilisation, the white
man's burden, the need for a strategic frontier, and so forth. These reasons are often put forward sometimes they are sound ; but, in sincerely c
;
WAR
CH.
addition to and behind everything else, there is the will of dominant Powers to continue dominant.
Against that clashes the will of the dominated to be free. There is the seed of wars of liberty, of
This wars, of wars of nationality to do with economics. has little force explosive It is outside the scope of this discussion, but it is none the less real. To ignore it and to seek an
irredentist
!
exclusively economic interpretation of war would be to neglect evident truths. The desire for gain,
whose subtle workings are the subject of study here, is not the only ferment that makes for international
war.
It
it,
upon
is important, in concentrating attention not to forget that the part it plays is limited.
4. Civilised nations do not go to war with one another with the avowed and direct purpose of loot. It is not, indeed, as was sometimes urged before
1914, in the nature victorious nation to
of
things impossible for a

.
make an economic
profit
by
exacting a war indemnity. An indemnity is equivalent to the wiping out of a foreign debt or to the
receipt of a foreign loan on which no interest need be paid. It may, of course, happen, if the in-
demnity
is
received
all at
once in a form unwisely
chosen, that industry will be disturbed, and incidental damage suffered in the process of adjust-
ment. But to assert in a general way that a nation which receives an indemnity must suffer a net economic injury from it is to uphold a paradox.
It will
generally gain, just as an individual will
gain
if
somebody
gives
him
a present.
it
however,
as this is admitted,
So soon, follows that the
in
19
amount of the gain may be greater than the cost of the war through which it was won. This must
the
acknowledged. Nevertheless, in view of enormous expense of modern military and naval operations, and of the chance that a war begun on a small scale may draw in other Powers,
be
fully
it is
extremely improbable that there will be to any country in the end any balance of economic gain.
For a government to enter on war in the hope of such a gain would be a colossal stupidity as well This is so far recognised that as a colossal crime. wars motived by the hope of loot in the form of
huge indemnities are not
not in this crude foster modern war.
It is
5.
practically to
be feared.
way
that economic influences
The
traders of industrialised countries natur-
ally
desire
Owing
profitable markets for their goods. to the general vogue of protective and pre-
ferential tariffs they often find themselves exposed, in territories controlled by governments other than
own, to fiscal handicaps as against the citizens of the controlling governments. Consequently, as a safeguard against these handicaps, they prefer
their
to see as large a part of the world as possible controlled by their own government. Having secured
this
still
much, they reflect further improved
that the situation

if
their
would be government could
handicap in the way of thus in many countries a tendency on the part of traders and manufacturers interested in exportation to favour self-assertion
fiscal
be induced to place a
their competitors.
There
is
by the government of
their
country in
regions
20
WAR
CH.
where expansion or the earmarking of spheres of

interest is feasible without too great risk. facturers of goods, the raw materials of
Manuwhich
come from
controlled
tropical lands, may also expect a greater complaisance in satisfying their wants in regions
by
their
governments.
own, rather than by rival, They, therefore, tend to back up
the traders interested in exportation. When the amount of trade actually done by civilised countries
with the regions of Africa and Asia controlled by them is compared with the amount dene with
it is,
regions politically outside the range of their influence, indeed, apparent that the economic prize that
merchants and manufacturers have looked for is not a great one. This is the more obvious when
it
recalled, first, that the figures of exports and imports measure, as it were, the turnover, and,
is
therefore, very greatly exceed the profit of the trade ; secondly, that the absence of national control, though
might involve a reduction, certainly would not involve the disappearance, of national trade (and the resultant profit) from controlled regions and,
it
;
thirdly, that the manufacturing and trading activity directed to any particular market is never a net addition to the aggregate manufacturing and trad-
ing industry of a country, but is, in great part, a mere diversion of it from other markets or other
These considerations suggest that the eagerness of manufacturers and traders to support policies of expansion in the search for markets is
products.
based on an imperfect realisation of the economic

consequences of these
policies.
But, however this
in

be, the fact remains that
21
may
many manufacturers
and traders do believe that political imperialism is, or may be made, a great factor in benefiting trade and industry. This belief they succeeded over
many
of the United
decades in imposing upon the governments Kingdom, France, Italy, Germany, Russia and Japan. Since the same territory
be controlled by two governments at same time, the necessary result was competition and diplomatic contests among these
cannot
the
governments.
not, however, chiefly as agencies for the trade of their nationals in relatively promoting undeveloped parts of the world that European
6.
It
is
governments have come into conflict with one another. They have also been pushed forward towards imperialism by the influence of financiers Here the gain in search of profitable concessions. There are openings for to be looked for is larger.
highly
profitable
investments
officials
in
loans
to
weak
can be bribed or for such governments in cajoled, building railways on favourable terms, in developing the natural of oil fields, or in establishing rubber resources
* '
governments whose
plantations on land taken from Africans and worked by the forced or stimulated labour of Africans When the government of at a very low wage. some civilised country has annexed, or is protecting,
* '
or has established a sphere of influence over, any undeveloped region, these valuable concessions are apt to flow, even when they are not formally reserved,
to financiers
among
its
own
nationals.
These
22
and powerful.
their voices heard
WAR
CH.
financiers are often rich
means of making
They have through news-
papers, of influencing opinion and of putting presIn Mr. Woolf's book on sure on governments.
Empire and Commerce in Africa there is a lurid account of the methods they sometimes employ. It is not my business to go through that sordid All that is important here is that the desire tale. for gain through concessions, as well as, and more powerfully than, the desire for gain through trade has impelled civilised governments into a competition for influence and control in relatively
undeveloped regions of the world. 7. This competition means diplomatic backing by governments of their traders and concessionseekers in weak States, coupled at once with attempts
to acquire
spheres of influence, protectorates or annexations for themselves and with resistance to

similar attempts on the part of others. Thus, the of the traders and of financiers different rivalry
nations leads to a contest among their governments " In this contest allies for places in the sun." and associates are helpful, and so the area of contest
is
extended.
In the background of
it
all
stands
No government wants to fight military power. for a sphere of influence or a concession for its
nationals, but every
there
is
some point
will fight, its
government knows that, unless at which people believe that it diplomacy will be relatively ineffective
;
and
this
it
knows too
that,
once
it
enters
upon
game
of bluff, the bluff may unexpectedly be called. In way the economic interest of private persons,
in
23
reacting upon the policy of governments, piles up further explosive material alongside of that already
prepared by desires for and resistance domination.

8.
to, political
Moreover, there is one private economic which operates in a peculiar manner. This is the private interest of makers of armaments. These persons wish to sell their goods. It need not be suggested that any among them are so
interest
suffering as to desire actual war But they certainly desire preparations for war. If they can persuade one government that another government is arming against it, they
callous to
for that end.
human
may The
their
obtain a lucrative order for ships or guns. leading armament firms of different countries
do not
own governments, nor

of,
limit themselves to supplying the needs of are they wholly in-
dependent
scares
or dissociated from, one another.
them to promote war and international competition in armaments. If they can induce one government to buy from them some new instrument' of war, this of itself affords them a powerful lever with which to induce other governments to do the same. They are not
It is to the interest of all of
without influence in the press, and, through the It is not necessary to press, on public opinion.
assume that the persuasion they exercise
is corrupt, or that they deliberately disseminate false alarms. It is enough to know that they find a profit in stimu-
lating the purchase of
armaments
that, so far as
they succeed, mutual suspicions and mutual fears among governments are fostered ; and that thus
24
burst,
is
WAR
CH.
the explosive material, out of which the flame of
war may
9.
piled higher.
This explosive material, we
has a peculiar quality.
Once
next remark, piled up under the
may
several influences I have described, it tends, like a living thing, to grow. The fear of war itself
governments to adopt policies that make war more likely. If there were no fear of war there would be no purpose in achieving strategic frontiers.
forces
One of the objects sought in conquering African colonies, namely, the recruitment of black troops, would exist no longer. of the grounds for
Two
refusing independence to subject populations desirous of independence, namely, the desire to draw soldiers from them, and the desire to prevent rival
nations from drawing soldiers from them and using their territory as the base for an attack, would also
But the search for strategic frontiers, disappear. the absorption of uncivilised regions rich in potential conscripts, and the refusal to set subject peoples
free are important factors in building up the warlike mind. Nursed by the fear of war, they themselves
make war more
likely
and are the cause of

for
further fears.
10.
What
has been said
certain
practical
conclusions.
may form the basis Though some
of
the causes fostering war lie outside the economic sphere, economic causes also play an important These causes can be controlled by wise part.
Much was done for harmony and peace policy. in the later nineteenth century by the use of the
most favoured nation clause
in commercial treaties.
in

recognised that a civilised State
its
it
25
It is generally
what
will
with
own
tariff,
may do whether for import
or for export. But, before the war, many States entered into widely extended contracts not to dis-
criminate against the goods of particular foreign

nations.
It
may be hoped
that
among members
of the League of Nations the policy embodied in most favoured nation clauses will become universal,
and, perhaps, even that some common bureau will be set up to ensure that the spirit of the policy is not violated by the imposition of duties, which,
though in form general, are in fact directed only against the produce of particular countries that it It is not, however, in the is desired to injure.
internal tariff arrangements of developed countries
that the chief danger to peace important are the arrangements
lies.
Much more
impose in under their control.

tries
which these counundeveloped parts of the world

Discrimination in these regions
' '
mother country is compatible with the theory of most favoured nation treatment. But it is not compatible with international harmony and it is at the root of the eagerness of traders for their own government to extend its sway in unin favour of the
;
developed regions. An international agreement to do away with this kind of discrimination and to
foreign possessions of European Powers to the traders of other countries on equal terms
open the
'
'
with the traders of the possessing Power would be a great step forward. Up till the time of the
war, in British possessions, as distinguished from self-governing colonies, no discrimination was
26
WAR
CH.
l exercised (except in a single unimportant instance ) against non-British traders. The recent imposition in West Africa of a tax on the export of palm kernels
and palm
spoiled
oil
to markets outside the

fair
Empire has
in
evil
this
record,
and
constitutes,
the
judgement of
many competent persons, an
and
dangerous precedent. ii. As I have already indicated, the desires of financiers and concession -hunters in undeveloped
countries
are
a
harmony than the
greater danger to international So long as desires of traders.
diplomacy stands ready to back the claims of these

persons, private competition in offers to lend money or build railways or run rubber estates or work oil
deposits is liable at any moment to be transformed into a struggle for prestige and power between
governments. Friction can, indeed, be softened by agreements to allocate specified regions to the But agreements nationals of different countries. of this kind are generally born only after long they threaten the allocated periods of discord region with monopolistic exactions, and are liable to be disrupted by the advent of claimants from among the nationals of some State not a party to the agreement. The way out is for diplomacy to
;
stand aside altogether, and to allow persons

1
who
wish to sink money in undeveloped regions to

In 1903 the Straits Settlements gave a rebate on the export duty on tin if the tin was to be smelted in the United Kingdom. In 1916 Nigeria imposed a special export duty on tin sent outside the British Empire. Hides from India got a rebate of two-thirds of the export duty if used within the Empire (cf. Knowles, Economic History, pp. 353-4).
in

concessions unaided and
27
to take
their
negotiate for their own risks of finding their debt repudiated. If they are backed by their national government, the profit they make, though a net profit to them,
may
than outweighed by the that the policy of armaments expense the forces them upon government and, backing through the government, on the' taxpayers of their It would, no doubt, be difficult for one country. government to withdraw diplomatic backing from
easily
be
much more
in
extra
concession - seekers while other governments did not but, if, under the influence of the League of Nations, all governments could be induced to do it,
;
there can be
little
doubt that
all
would
gain.
It
will, of course, be understood that a refusal on the part of governments to back their nationals in the
search for concessions does not imply leaving the private citizens of civilised countries to do what
they choose in undeveloped parts of the world. Europe owes to the natives of these places protection against exploitation
by European adventurers.
This obligation is recognised in the theory of mandates as embodied in the covenant of the League
of Nations.
12.
There remain armament
firms.
The danger
of allowing these concerns to continue in private
hands and to trade, not merely with their own, but with foreign governments also is obvious. But to nationalise armament industries is not altogether
easy.
government wanted battleships and guns and ammunition in exactly the same quantity every year, there would be no great difficulty. But,
If
28
WAR
CH.
besides actual armaments, governments also desire to have available an equipment capable of increasing
their armaments very greatly and very rapidly in the event of war breaking out. The best way of securing this is to have a number of large plants
accustomed to making armaments in ordinary times. This means that a far-seeing government will spread orders, so that a number of concerns, which normally make merchant ships, shall also have the habit of making warships. It also means that such a government will allow armament firms to take orders from foreign governments, so as to make it worth their while to maintain a large plant and a specially trained staff even when its own orders are small. If it manufactured its own armaments exclusively and allowed no private person to manufacture any armaments, the difficulty of expanding production in war-time would be very much greater than it is. Consequently,
for a single
government
to nationalise the
armament
This
industry would be a dangerous enterprise.

great step
away from war might, however, be taken
under an international agreement. 13. So far attention has been confined to sorts of economic activity that promote conditions of war between governments. Naturally there are also important economic factors making for peace.
great nations afford very important markets one another's goods, and people do not wish, if it can be avoided, to fight with their customers. Moreover, trade and travel and the development of means of communication promote an improved understanding of one another by the peoples of
for
The
in

It
29
was the hope of Cob den freedom of trade in hand with inhand among nations might go creasing friendliness and ever- diminishing danger of war. That hope has not been fulfilled, but it may still be reasonably entertained. Moreover,
different countries.
and
his friends that increasing
besides the co-operation of individual citizens of different nationalities in trade, there is also scope
for ever-growing co-operation in connection with economic
among governments
interests
extending
beyond the range of single States. Of this kind of co-operation the international postal convention
affords the classical example.
the League of Nations
Under the aegis of more and more occasions
for joint economic effort may be found and utilised. If this happens, the fact of economic co-operation may be expected to stimulate the spirit of it, to
lessen international rivalries
and
jealousies, to
make
possible diminished armaments, and so to lessen that fear of war, which is, both directly and through
its
indirect influence
on
policy,
one of
its
principal
causes.
CHAPTER
IV
RESOURCES AVAILABLE FOR

i
.
WAR
THE real resources possessed by any country conof the mental and
sist
its
manual power of its people, of

its
land and mineral deposits, of
material capital
'
of buildings, plant, railways, ships and stores of goods, of its immaterial capital of organisation/ and of the legal rights of its citizens to payments
from
foreigners.
In the normal
political
economy
of peace these various resources are conceived as being engaged with a certain rhythmic regularity
in producing the national dividend, or national real income, of successive years. Economic analysis
and the study of proposals
for social reform centre
upon the magnitude, the distribution among people, and the variability in time of this national dividend. In stationary conditions a country's resources would, after making good the wear and tear of capital equipment, produce every year about the same volume of dividend, the whole of which, whether in the form of goods or of services not embodied in goods, would be consumed. In progressive conditions, a portion of the dividend
3
CH. iv
RESOURCES AVAILABLE FOR WAR
31
to the capital equipment,
would take the form every year of some addition making possible the pro-
duction of a rather larger dividend in the future. In stationary and progressive conditions alike a country's resources would not be worked at the
imaginable intensity, and would not, therefore, yield the maximum imaginable dividend, partly because people want leisure as well as things, and partly because (at least in progressive condi-
maximum
changes in the direction of demand continually call for readjustments in the machinery of production, so that it is always in some slight measure out of gear. 2. In time of war the fundamental human and
tions)
same
material resources of a country are, of course, the But they are swung into as in time of peace.
different
channels, and the centre of interest is changed. Thus, whereas in normal times we are concerned with the amount of goods and services
that a country can produce regularly while its people enjoy their normal amount of leisure, in war we are
concerned rather with the amount that it can squeeze out for immediate use in the actual processes of war. When the normal income-producing power
of the country is given, there are four principal the real war sources from which this amount
fund, as
it
were
(3)
augmented production,
sumption,
capital,
3.
can be drawn. These are (i) (2) reduced personal conreduced investment in new forms of
:
and
(4) depletion of existing capital.
scope of augmented production depends upon the amount of slack, as it were, that the people
The
32
up by reduction of
*
WAR
leisure.
CH.
are able to take are a certain
To
begin with, in most
advanced
'
countries there
women, who
number of people, both men and are accustomed to do no work at all,
or only a nominal amount of work, to live on private means or on the earnings of other people, and to
spend their lives in sport, games, social functions, travel and amusement. These people may be drawn into the ranks of active workers, whether in the army, in the hospitals, in industry, or even in taking
the place of servants in their own houses. Along with them come a number of elderly persons, who, in the ordinary course of events, would have
retired
lives,
from industry
but who, in
for the closing years of their fact, carry on or return to it.
industry at
girls too may be drawn into an age earlier than is usual. Moreover, it is not merely by an increase in the number of workers that extra work may be forthcoming. Men and women, who are accustomed in normal times to work with ordinary intensity for ordinary hours, may work much harder and
Some boys and
more continuously. It is, of course, true that work carried on at too high a strain or for too long hours
means, not an increased, but a diminished, output, and that in the earlier days of the Great War the hours worked in munition-making industries were
often unproductively long. Nevertheless, there is little doubt that many persons can, at need, do more
work than they
are accustomed to
do in normal
times, and, as a result, can produce, and continue for a long period to produce, more goods.
iv

The
33
additions to productive power which I have been just describing are, of course, in large part called out by the direct action of patriotic sentiment.
Volunteers flow into the army and munition-makers readily accept long hours, just as a family would do which suddenly discovered its house burning and in crying need of salvage. With patriotism
there
may be combined
direct or indirect coercion
upon
individuals to render a tribute of work.
This
coercion brings into the national store working power over and above what patriotism would send
there.
Direct coercion
is
most
fully
exemplified
in the conscription of men of military age into the Indirect coercion operates through fighting forces.
heavy taxation, either overt or concealed.
This,
by threatening
their standard of
life,
people to strive for larger incomes. those who are in no way moved by patriotic enthusiasm may be willing to work longer hours or
to step into some kind of industrial pursuit from a life of leisure or retirement. In these ways there
may drive To this end
comes about an expansion
in the supply of
work
available in response to a given real price. War also promotes an expansion in the demand for work, in the sense of the offer of a higher real price per
any given quantity of work. For the government, absorbing money from the richer
unit
for
members
hands
it
of the
community
in taxes
and
loans,
over to
into the army.
men withdrawn from industry The withdrawal of these men from
industry makes those that are left more valuable and makes it worth while for employers to offer
34
left
WAR
CH.
standard rates of wages to
men who would normally

This expansion of
(including
soldier's
have been
the
real
unemployed.
for
demand
labour
work), in spite of the fact that the production of goods consumable in ordinary life is bound to be
diminished, is made possible by the transfer to government through taxes and loans of things, or the equivalent of things, which richer people or foreign lenders would normally have used for themselves, but which the government now offers
in
payment to soldiers. The increased real demand, of course, causes more work to be done and is responsible for sweeping into industry
number
of
people
who
are
ordinarily
only
hangers-on.
We have not, however, exhausted the ways in which industrial slack may be taken up and the volume of productive effort increased. In normal
times there are apt always to be a certain number of stoppages of work due to disputes between
employers
a
and employed.
These stoppages
in-
of productivity, not merely in the volve industries in which they occur, but also in other industries that use the product of these industries
loss
as
them
raw material or are otherwise connected with for a stoppage in one part of the machinery
:
of industry throws other parts also out of gear. In war time stoppages of work are liable to be
greatly cut down in range and importance by the patriotic desire of employers and employed to do
nothing to hinder victory.

arises,
They may
also, if
need
be directly prohibited by
legal enactments
iv
35
that in normal times

tolerate.
public opinion would not
Finally in normal times there is apt to be a deal of involuntary unemployment resulting
good from
inability on the part of the persons thrown out of their jobs by temporary fluctuations of demand to
find immediately new vacancies where there is need of their services. In the later stages of the Great War the need of governments for various sorts of munition-workers was so enormous and so well
advertised that anybody out of a job

at
would know
once where one could be got. The loss of working power, that a country normally suffers through the failure of supply to chase changes in demand quickly enough, is likely in a great war to be almost
wholly done away.
4.
We may now
turn to the second source out of
which a war fund may be built up, namely, a reduction in personal consumption on the part of the
Obviously, if people eat less, travel less, go to fewer theatres, make use of fewer servants,
people.
burn less coal and so forth, they set which are turned in normal times to
free resources,
satisfying their
personal wants, to satisfy instead the war needs of the State. In a later chapter various sorts of per-
economy will be studied in detail and their comparative effectiveness as means of augmenting the national war fund will be examined. For
sonal
the present, therefore, it is sufficient to assign to them in a general way their place as one of the four
main sources from which the
real national
war fund
may
be drawn.
36
WAR
CH.
5. At this point attention may be called to a possible confusion of thought. There is danger, in a superficial study, of regarding as additional
production for war use something that is really a diversion to war use of resources normally devoted
This mistake is especially be made with reference to women's work in war time. During the Great War in the United as in other countries, an enormous Kingdom,
to private consumption.
likely to
number
of
women
flocked into industry.

-
Many
making, and in occupations railway service, for example many from which men had been withdrawn for military
were engaged directly in munition
service.
At
first
these extra
women
sight it is natural to regard as a net addition to the pro-
ductive
is
power of the country.
This,
however,
a mistake.
who
large proportion of the women entered industry for the war period were with-
drawn from domestic service. In so far as they worked harder at munitions than they had worked in that service, the aggregate real income of the country was, no doubt, increased. But that part of their industrial activity which corresponded to their former domestic-service activity was not an It was a transfer addition to productive work. from work in the service of private consumption to work in the service of the war. Again, many of the women who came into industry had been engaged previously in work in their own homes. The services rendered by them in this work were a part of the nation's real income, and must be set against the services rendered by them in war in-
iv
37
dustry, before the net addition to real income can further complication is introbe arrived at.
duced by the fact that many of the men, for whom women had been managing homes, were taken into the army. As a rule they no longer needed homes managed for them, but their food had still to be cooked and other services of this class rendered. Strictly, it would seem, in order to get the net addition to productive effort due to the move-
we ought to subrendered by cooks and other such persons within the army itself. This is, of course, It is not, however, a small matter a small matter.
into industry,
tract the services
ment of women
women's industrial work war time represented, not an addition to the productive power of the country, but a diversion of existing productive power from personal consumption to war service. 6. The third source of the real national war fund is reduction in the volume of resources turned to new investments other, of course, than war
that a substantial part of
in
investments.
If a
man
or uses exports to buy or if a public department puts up a new school or a new gasworks, resources are thereby diverted from making or serving instruments of war.
builds a house or a factory a house or factory abroad,
Economy
in
making new non-war investments may
permit of a very large addition to war resources, because in most advanced countries considerable
new investments are normally made every year. In the United Kingdom before the war the aggregate of home and foreign investments together was
38
every
year
WAR
CH.
increased
by between 300 and 400
millions sterling.
7. There remains the fourth source out of which war fund may be created, namely, the depletion of existing capital. The most obvious form of this is the direct taking over for war use of particu-
is
goods. A portion of a country's capital normally in the form of stores of consumable articles held in warehouses and shops on the way from manufacturers to ultimate purchasers. These stores can be drawn upon. The wheat stock of the country, for example, may be reduced from ten weeks' supply to three weeks' supply, and so on.
lar capital
Besides the stores of circulating capital, certain kinds of fixed capital can also be drawn upon. For example, in the Great War the output of new rail-
way material for service in France was supplemented by taking up and shipping to France considerable
lengths of railway track from certain English and Canadian railways. Most sorts of fixed capital
cannot, however, be used in this way. Houses, factories, the greater part of the country's railway
equipment, its ships, its mines and mining equipment, its land and its machines cannot be turned to direct consumption, but must retain their quality of capital. Hence, the extent to which a war fund can be built up by the direct use of bits of capital
is
limited
however, a second way in which is, can be drawn upon. Instead of taking capital bits of it, we may absorb and concrete away using for consumption resources that would normally be
There
'
iv
39
employed
national
in maintaining it in good condition. The dividend, or national income, as usually defined by economists, means the amount of real
income
for
available after enough has been set aside renewals and repairs of equipment. In the United Kingdom it was estimated before the war
some 170 million pounds' worth of national effort was needed to keep the capital of the country There are certain difficulties connected intact.
that
with this conception

investigate
but
it
is
not necessary to
them
here.
a very simple
one.
The point to be made is By refraining from normal
repairs and replacements, by letting railway tracks get into disrepair, by keeping old and worn-out machines at work and by taking exhausting crops from the land without equivalent replacement by adequate manuring, further resources, over and above those ordinarily devoted to producing income, can be drawn in to swell the nation's immediate economic power in the face of war. What has been said in the preceding paragraph is applicable even to countries supposed to be comWhen pletely isolated from the rest of the world. communication with outside nations is open, the opportunity for using capital in immediate con-
sumption is much wider. Pieces of capital, that, from their physical nature, are incapable of being turned to war service directly, can now be so turned indirectly. They can be sold to foreigners in exchange for munitions and food and other things capable of entering into immediate war consumption.
Different pieces of capital differ greatly in
4o
WAR
CH.
There is an important distinction between objects that can be transported outside the country to a foreign buyer and objects in respect of which it is only possible to transfer a title of ownership within the country. Gold and silver, jewellery and works of art can
the ease with which this can be done.
actually be shipped abroad if the seas are safe enough. But If this is done the foreign buyer runs no risk. titles of ownership over things that cannot be shipped
abroad, whether country estates or shares in companies whose works are situated here, or the bonds
of British local authorities, are in different case. foreigner who buys these things runs the risk
of finding his claim barred at the end of the war, should the nation with whose subjects he has
be overwhelmingly defeated. This kind of capital is, therefore, apt in war time not to find ready foreign buyers. There is, however, yet a third kind of capital that the citizens of a warring
dealt
State
may
possess, namely, holdings of securities
issued
by companies in neutral countries, which are capable of making the things their government wants for war, and in which, therefore, it is anxious to obtain purchasing power. These things citizens of the neutral countries will much more readily buy, and the munitions and food purchasable
with the
proceeds
of
their
sale
may
yield
to
a substantial selling countries their real war fund. During the

is
supplement to Great War, as

held
well
known,
the
dollar
securities
by
to
citizens
of the United
Kingdom enabled us
supplies
buy an enormous volume of war
from
iv
41
America, not only for ourselves but also for our

Allies.
Yet again, when international communication

is
open,
it
is
capital into
income
possible for a country to turn its available for war in another
sense
form of foreign
tained in
namely, by creating negative capital in the loans. These loans may be ob-
some small measure by
individuals
whom
foreigners are willing to supply with goods on long credits ; they may be obtained by banks in the
form of a deposit of balances by foreigners may be obtained by a belligerent government

through individual foreign subscriptions to
they
either
its
issue
of war loan, or by foreign loans directly negotiated with a private syndicate or with the government of a foreign country. If there is widespread fear
that the would-be borrowing country will suffer overwhelming defeat, loans of this kind will be
difficult to raise, for
ties
the
same reason
that the securi-
of concerns resident in the country are difficult In the Great War the to sell in foreign markets.
United Kingdom and
its
European
Allies
were
enabled to secure a very much larger mass of them than would otherwise have been possible, because, after the entrance of the United States into the war, there was a powerful political motive for granting them. From the point of view of the borrowing nation, there is evidently no great difference between
selling dollar securities held
by
its
citizens
and
sell-
ing its own the former arrangement the subsequent flow of income into it from abroad is checked; under the
government's promises to pay.
Under
42
it
WAR
CH.
is
latter the
subsequent flow out of correspondingly augmented.

8.
to abroad
Our analysis of the sources from which

be drawn into
real
war
fund
(2)
may (i) augmented production, economy of consumption, (3) economy of new in-
vestment and
(4) depletion of capital may be thought at first sight to provide a straight road to a further
distinction, enabling us to separate ways of providing the real war fund that hit the present only and
ways that, by rendering a country's capital equipment it would otherwise have been, hit the future. Extra work and economy of personal consumption seem to be at the expense of the present, economy in new investment and depletion of capital at the expense of the future. But no such simple division is really warranted for two reasons. First, monies obtained by diversion from expenditure are not wholly irrelevant to the future. There is such
smaller than
*
'
a thing as investment in human capital as well as investment in material capital. So soon as this is recognised, the distinction between economy in personal consumption and economy in investment becomes
blurred.
is
For,
up
to a point, personal
consumption
:
investment in personal productive capacity. This is specially important in connection with children to reduce unduly expenditure on their consumption may greatly lower their efficiency in afterlife. Even for adults, after we have descended a
we
certain distance along the scale of wealth, so that * unare beyond the region of luxuries and
'
necessary
comforts,
is
sumption
check to personal conalso a check to investment in capital

a
iv
43
interpreted broadly, and, as such, hits the future. Secondly, that part of the war fund that is pro-
vided by augmented production will also, in some measure, strike the future. If a country at war
carries
fact,
extra
work beyond
its
a point,
it
draws in
It does munition-
though not in name, upon capital.

if
it
this
works any of
citizens in
making or other occupations with such intensity, or for such long hours, as to wear them out prematurely. It has already been pointed out that length of working day and intensity of effort carried
too far defeat their
a
own purpose by
bringing about
diminution, instead of an increase, of output at the time. But there will be a stage before this,
which, though the extra hours and intensity improve output over the comparatively short period over likely to be covered by a war, they damage it the longer period covered by the working life of the people affected. This implies a using up of
at
human
Again, a country may augment its income by turning its boys and girls on to immediately productive work instead of leaving them to their normal period of school time and training. This corresponds to the device of augmenting available income by refraining from repairs for the human and renewals of material capital intact if capital of the country can only be kept
capital.
available
successive generations are trained up to take the place of their predecessors at a like level of educated These considerations make it plain that capacity. any attempt to distinguish with accuracy how far
any fund for war has been provided
at the
expense
44
WAR
CH. iv
of the present or at the expense of the future would encounter formidable difficulties. Nevertheless, as a rough and practical conclusion, we may reasonably
assert that,
whereas resources obtained by using up

refraining wholly hit the
existing capital or
by
from the creation
future, resources capital obtained by augmenting production or by diverting resources from the service of personal consumption are secured, at all events in large part,
at the
of
new
expense of the present.
CHAPTER V
REAL AND MONEY
i.
WAR
COSTS
AND EXPENDITURE
of real resources available for war, as set out in the preceding chapter, does not, of course,
THE sum
measure the
loss
that a country
which becomes
engaged in war may suffer. In any attempt to compute this it would be necessary to take account
enormous destruction of values outside the the shattering of economic sphere altogether
of the
human
promise,
the
accumulated
wounds and
of
disease of
many who go
suffering in to fight, the
accumulated degradation in thought and feeling many who remain at home which war almost Moreover, even if we keep inevitably involves. within the economic sphere, it is evident that losses may be inflicted by direct enemy action on parts of the economic body of a country that are not, and perhaps could not be, directly mobilised for war. For instance, in a country invaded by an enemy, much private property may be destroyed In a country in the actual operations of war. which is not invaded great losses may be inflicted upon many people through the interference with
45
46
war
involves.
WAR
CH.
foreign trade which

clearly recognised.
All this
must be
The economic
resources mobil-
ised or mobilisable for

relation to the costs of
2.
war do not bear any direct war in the widest sense.
So much being understood, we may proceed
to note that, in
of real resources for of
modern conditions, the mobilisation war takes place under the aegis and is both depicted in and worked governments,
through the organisation of State budgets. These budgets, though they do not represent in any
way the losses of war, do, therefore, remobilised war resources, or what was called present Both in the preceding chapter the real war fund. the money fund that appears in the government
significant
budget and the
real
war fund have, however, two

at
:
The money fund is aspects. revenue and money expenditure

is
once
money
the real fund
The at once real costs and real expenditure. two sums of money are, of course, identical. But what the money, as raised, represents is not identical with what the money, as expended, represents. The real costs consist in the services and things (including leisure) that people do without in consequence of the government's demand for money the real expenditure consists in the services and things that the government buys with the money and actually uses in war. Behind both of these lie the real resources available for war, out of which they grow. Nevertheless, they are distinct. This distinction and others closely associated with it give rise to a number of difficulties and confusions, which it is important to clear out of the way.
;
REAL AND MONEY WAR COSTS
47
3. First, consider the relation between real costs and money costs. At first sight it might be thought 100 to that, whenever an individual pays over the government's money war fund, he is thereby 100 worth of the real necessarily shouldering costs of the war. This, however, is by no means
so. large part of the money paid over by particular individuals to the government represents,
not real costs borne by them, but real costs thrown by them on the shoulders of other people. Thus,
suppose that a
man
obtains funds to pay his taxes
or subscriptions to war loan by cutting down gifts and charities or by reducing payments to employees
whose
'
services are
'
economises economise at
in
all,
person who not really and does not himself hand over
still
retained.
these
ways
does
government. throw the task of meeting the requirements of government upon somebody else. If he reduces an old servant's pension by 100,
any
real resources for the service of the
What he
does
is
to
this old servant has
somehow
(unless he, in turn,
can pass the task forward to some one else) to work harder, to economise, to refrain from new invest100. ment, or to use up capital, to the extent of The original economiser has shouldered no part of the State's burden he has merely transferred In like manner, if a the obligation to do this.
*
'
man
sells securities in his
possession to a fellow-
and pays taxes and war loan instalments out of the proceeds, what he has done has been to part with a property right in order to induce somecitizen
body
else to
undertake the task of working harder,
48
'
WAR
'
CH.
or economising in consumption, or refraining from investment in new real capital, or using up real capital by selling it to foreigners or otherwise. He
himself has done none of these things. He has acted as an intermediary, not as a principal, in
undertaking the real costs that his

represent.
money payments
The same
the
money
thing is true if he obtains he hands over to the government by
borrowing either from private persons or from banks resident in his country. Finally, the same
thing
is true,
up
to a point,
when people
provide
and war loan subscriptions by their consumption of articles tobacco, reducing or tea wine, sugar a part of the price of which is made up of customs or excise duties. Suppose, for example, that a man meets an income-tax claim 60 by cutting his expenditure on these things for that amount, and that this involves a reduction by
funds
for
taxes
20 in his payment of indirect taxes. In he has cut down his total 60 to tax payment from 40, and, therefore, if the aggregate revenue required by government is decided upon, has made it necessary for other taxation to be imposed on other people (and himself) sufficient to fill this gap. Abstinence from dutiable
of, say,
these
circumstances
articles, therefore, constitutes, so far as the duties included in their price are concerned, not a provision, but a shifting, of so much of the real costs of war. 4. Secondly, consider the relation between real
war expenditure and money expenditure.

'
It
is
often thought that, since the latter of these repre' sents the former, it may be used unconditionally
49
This opinion ignores the fact that to measure it. the aggregate money price expended on real resources may be altered, not only by a change in the quantity of real resources bought, but also, alternain the price that is paid for each this error large structures of fallacious reasoning have been built up.
tively,
by a change
unit of them.
On
Thus, it is widely believed that the real expenditure to a people of waging war is greater or less according as the rate of pay to its soldiers is
high or low, and according as a large or small amount of money has to be paid in respect of their dependIn 1914 many people argued that Germany ents. the war more cheaply than we could conduct could because her soldiers, being conscripts, received a much lower rate of pay than ours did. Again it was,
by many people that, because have dependents, to whom separation allowances must be made when the men go into the army, whereas, in general, single men have not such dependents, a married soldier involves much more real expenditure to the nation than a single soldier. But the real expenditure involved in the maintenance
still is,
and
believed
married
men
of the
army
soldiers.
the expenditure of the services of the Hence, the rate of pay given to them
is
does not directly affect the real expenditure of the If more is paid to them than they would normally earn, a certain transfernation in any degree.
is
;
ence of resources
to
made from
if less is
the rest of the
paid to them than community a certain transference is would earn, normally they made from them to the rest of the community.
them
50
WAR
CH.
The
aggregate real expenditure on the war of them and the rest of the community combined, that is to say, of the country as a whole, is the same in either
event
it is
equal to the
sum
of the services which
they render.
second form of the same fallacy often appears
In in arguments about government extravagance. form of of these arguments every alleged many
extravagance is lumped together under the same head, and it is tacitly assumed that the face value of the extravagance always represents the real
For expenditure that it involves to the nation. of the alleged extravagance continuing example, to pay 400 a year to Members of Parliament, of
paying exorbitant prices to contractors or exorbitant wages to work-people, of taking troops to some place at heavy cost and then taking them back to the place from which they came, of making
immense
is
afterwards found to be useless

effect.
are
quantities of a certain kind of shell which all these things to be similar in character supposed exactly
and
This
is
incorrect.
From
the
money
standpoint of the Treasury, it is, of course, true that they stand upon the same footing. They all the balances and make necesgovernment deplete
From the standsary the raising of more money. a of the as whole, however, they community point
comprise two quite disparate kinds of extravagance, the effects of which are wholly different. To make masses of shells of a kind that we do not want is to transport a real waste of capital and labour troops from Egypt to the Dardanelles and then to
:

them back
51
transport
not properly packed,
again, because the ships were But to is also a real waste.
pay a man, whether he be a Member of Parliament, or a contractor, or a workman, much more than his services are worth, that, undesirable though it is,
resources.
to
does not directly involve any waste of national It is merely a transference of resources
one
set
made
the
to
to foreigners are different

set.
is
of people in the country^ payments at the expense of
another
Of
course,
it
if
money
taken to
make the
into
the people from whom transference would

loan, whereas those
otherwise have put
war
given use it in unproductive personal consumption, the country's power to carry on the
it is
whom
is indirectly weakened. Of course, too, large money payments by the government for services rendered to them mean large borrowings and,
war
consequently, a large national debt and the fiscal In complications associated therewith later on.
view of these things, it would be ridiculous to contend that large money expenditure due to excessive
payments made to contractors and work-people do not matter. They matter a great deal. Butand this is the thing with which we are now alone concerned they do not represent directly any
war.
addition to the real expenditure involved in waging In the same way, if the government com-
mandeers the services of men or buildings for lessj than their market worth, or even for nothing at all,
while lowering the money expenses, does not directly affect at all the real expenses of the war.
this,
5.
Lastly,
consider the
relation
between
real
52
costs
and
real expenditure.
WAR
CH. v
The services and things that people do without in order (including leisure) to meet the government's money demands on them
are not identical with the services and things that the government buys in order to carry on war.
What
new
private people do without consists in pleasant food, the work of domestic servants, new houses,
motor-cars,
factories,
new
petrol, convenient travel, new clothes and so forth. What the
government gets consists in the services of soldiering and of manning ships of war, together with immense
masses of guns, shells, aeroplanes, tanks, poison gas and explosives. If there had been no war, the great bulk of these things would not have come into
being at
different
all.
They are, and are bound to be, quite from the things that would then have
This distinction provides the
come
into being.
basis for certain practical inferences that will be developed in the next chapter.
CHAPTER
VI
THE CHOICE AMONG PERSONAL ECONOMIES

i. As was pointed out in Chapter IV., one of the sources out of which the national war fund may
be built up
that,
is
personal
economy
sight
in
consumption
by private people.
At
first
we might suppose
when once
the public had decided to economise

its
by cutting down
value, say a million difference to anybody

,
consumption by a given money it would be a matter of in-
other than the individual economisers what particular sort of purchases they decided to cut down. The analysis of the precedthis
ing chapter has, however, prepared us to see that is not so. The productive powers released
different sorts of million
all
from private service by

economies are not
equally well fitted to furnish the sort of things that governments need for war. This important point is well illustrated by a com-
parison of two extreme examples. First, suppose that the public are accustomed every year to buy a thousand 's worth of shells and to explode them
for
in
amusement in a barren place. It they decide war time to dispense with this luxury, the
53
54
WAR
CH.
service are free to
productive powers they thereby release from their make an equivalent mass of shells
for the government ; and shells are things that the government greatly wants. Secondly, suppose that the public are accustomed to spend a thousand
lace
in purchasing exquisite unexportable hand-made manufactured by people who are unable to do
anything whatever except make this lace. If they decide to dispense with this luxury, they release
from
their
y
service
productive powers, which, ex
hypothesi are incapable of contributing anything whatever to ths war needs of the State. On the
supposition then that the shells and the lace occupy scale of people's wants, both economies will involve about the same sacrifice
similar positions in the
fund
of private satisfaction, but one will help the war Extending the greatly, the other not at all.
line of
thought that these illustrations suggest,
we
readily conclude that, other things being equal, different sorts of economy on the part of the public are more or less effective means of helping to win
a war, according as the productive powers they set free from private service are more or less well fitted
to
produce things that the conduct of war requires.
The
practical implications of this principle may conveniently be set out in two divisions, according
as they affect purchases of direct personal services
or purchases of commodities.
2. First, it is quite plain that in war time the services of doctors, of men of mechanical knowledge, of chauffeurs and of young able-bodied men fit for
military service
and not possessing any
specialised
vi
PERSONAL ECONOMIES
the price
55
for
skill are, relatively to
commonly paid
them, of great value for war.
On
the other hand,
the services of lawyers, of highly skilled gardeners, of poets, of men learned in the ancient languages, of musicians, of actors, of young men medically
unfit or with conscientious objections to
service, of midwives, of
combatant
with special skill as children's nurses, of ballet dancers and of musichall artistes, are. relatively to their price, of very
little
women
value for war.
equal, people will make a tion towards victory by
Therefore, other things being more effective contribudismissing

fit
chauffeurs,
young men
servants,
and women servants without

for industrial
specialised training but physically
work than by dismissing other (and probably older) servants, whose value is chiefly due to specialised quality of little utility in war a highly skilled
flower gardener, an artist in cookery, a nursery maid or governess exceptionally skilled in her chosen task but inept at handling material things, a court
musician or a court jester. 3. Secondly, consider purchases of commodities. There are certain things that are wanted by government in exceptionally large quantities for the use
its armies things such as gunpowder, petrol and meat. These are obviously good things in which to economise. Then there are things made out of materials essential to war needs, economy in which sets free these materials. Examples are articles made of leather, wool and steel. Again, there are things made by the same kind of machines and work-people as are required for making things
of
56
WAR
CH.
These include the proto war needs. ducts of engineering works and the plant required Yet again, there are for setting up war factories.
essential
things the acquisition of which involves the use of ship space and train space that are in great demand
Pro tanto these things imports for military ends. from overseas, such as oranges and bananas, and articles the raw materials of whose manufacture
are largely imported, such as beer On the objects for war economy.
are suitable
other
hand,
of commodities, which are not useful for war purposes and the value of which is
there are a
number
not to any substantial extent due to material, plant, labour or transport services useful for such purposes. These things are, in comparison with the others,
unprofitable objects of
war economy.
Among them
should be included ball- dresses and similar costumes
made
which principally of a kind for on work depends highly specialised which war has very little use. There should be
in England, the value of
included, too, water, as supplied by a water company to a town, and, in lesser degree, gas and electric should be included the Finally, there light.
services rendered
by museums and
art
galleries.
In these institutions and their collections there is embodied an enormous capital plant quite useless,
as
or nearly useless, for rendering war service. If, a result of our economies, they are shut
down, their staffs may, indeed, be utilised in war, but the public loses, not only the use of their staffs, but also the use of the capital establish-
ment
of the institutions
and that
loss is
balanced
vi
PERSONAL ECONOMIES
to the government's
57
by no corresponding gain
efficiency.
war
4. These results lead at once to the ethical problem of private duty. In view of the fact that certain sorts of economy on the part of the public are more effective aids to war than others, what ought the patriotic public to do ? It is important that there should be no confusion about the precise
issue here.
it
The preceding
discussion has
made
plain that several sorts of luxury goods are less advantageous objects of economy than the bulk of
necessary goods.
The
issue
is
view of
to
this fact, a rich
man may
not whether, in properly continue
buy ball-dresses in war time. He ought not to buy ball-dresses, because, by refraining from doing
he can cut his aggregate expenditure down lower than he could do otherwise. The issue is
given the
:
so,
amount
of the cut to be
made
in his
aggregate expenditure, would he do better to take 100 off ball -dresses or off bread? The hasty
answer, of course,
is
that every one ought to con-
centrate entirely upon the sorts of economy that are most helpful towards victory. But this answer
not correct. With sufficient knowledge it should, indeed, be possible, on the basis of what has been said, to draw up a kind of order of merit among
is
different sorts of economies from the point of view of their comparative effectiveness. But this order of merit cannot be used as a direct criterion of
private duty. People's duty depends, not only on the comparative usefulness to the State of different sorts of economy, but also on the comparative
58
WAR
CH
themselves that different sorts involve In general, the last shilling that they choose to spend on one thing may be presumed to yield them about as much satisfaction as the last they spend on another thing. But on all things the earlier
sacrifice to
shillings are likely to yield them faction than the later shillings.
much more
Hence,
it
satis-
will, in
general, hurt
them much more
to concentrate their
economies upon a few things than to spread them over many. People, therefore, have no duty to select the economy that stands first in our order
of merit, to stop completely their purchase of that, and to proceed in the same way down the list till
the whole reduction in expenditure that they in-
tend to make
is
accomplished.
Nor have they
necessarily a duty even to knock more expenditure off a thing high up in our order of merit than off
one lower down
for, if the
one high up
is
is
some-
thing for which their demand bread, for example a tenth

will
highly inelastic
knocked
off that
mean
is
much
elastic.
tenth
knocked
their
bigger sacrifice for off something for

-
them than a which their
They have a duty, however, in things high on the list economies push rather further, and on things low on the list rather less far, than their personal preferences by themTo what extent they ought to do selves suggest. these things could, of course, only be determined
to
demand
on the
details.
5.
basis of a full
knowledge of
all
relevant
tinction that
Moreover, the issue is complicated by a dismust be drawn between the duty of a
vi
PERSONAL ECONOMIES
and the duty of a group.
59
If a
single individual
single individual,
who
has to cut
down
his aggregate
1000, on patriotic grounds cuts of petrol 10 per cent more, and consumption his consumption of music 10 per cent less, than he
expenditure by
his
personally likes to do, the price of petrol will be put a little lower, and the price of music a little higher, from the short period point of view relevant to the war than they would have been put otherwise.
Consequently, other people will buy a little more petrol and a little less music than they would and his patriotic action will thus be have done
;
robbed of its full effect. How far the good he tries to do will be cancelled in this way depends on the nature of the demand and supply of the commodities concerned. If the demand is highly if inelastic, there will be very little cancelling there may be a good deal. it is highly elastic But, if there is any cancelling at all, for one out of a hundred individuals to cut off his petrol consumption (in preference to his music con:
sumption) in a given degree helps the government less than one-hundredth as much as similar action on the part of the whole hundred would do whereas, if the individuals are all similar, it involves exactly one-hundredth as much loss of It follows that, as with such private satisfaction.
;
things as the Sunday closing of shops and limited hours of work, it may be the duty of the community
a whole, acting through its government, to enforce upon all its members a more stringent
as
selection of economies than
it
would be the duty
60
them
acting alone
WAR
CH.
of any one of
to make. 1
on
his
own
initiative
6. Three forms of government action are possible propaganda, the imposition of duties on the pur-
it
chase of things the private consumption of which is especially desirable to cut down, and direct
restriction of individual purchases. The method of propaganda does not call for study here. Its
general character is obvious and its detailed application the concern of political technicians. The
method of
duties cuts off from each purchaser an amount of consumption which varies with the amount of his normal purchases coupled with the If the demands of two elasticity of his demand.
1 Analytically, the basis of this argument can be developed Let there be n similar purchasers of a commodity. as follows
:
Let the quantity consumed by each be A and the elasticity of the demand of each -77. Let the elasticity of supply of the commodity be e, and let this be positive. Then, if one of these
purchasers cuts
down
first
his
easily shown that the reduction in aggregate
consumption from A to nothing, it is consumption will be,
not A, but, as a
if
approximation,
-?? = o, this is equal to
if
(n i) -77 is infinite, it is equal to

77
ne
- -~
-.
Obviously,
nothing.
It may be observed, in passing, that a corresponding formula can be obtained for the aggregate effect upon production of the addition or withdrawal of the output of any one producer. Let A now represent each individual's production, e the
- the elasticity of his supply, and elasticity of the general demand. Then the aggregate effect of the withdrawal of A units by one producer approximates to
rj
If -TJ is very large and e is small, this approximates to converse conditions it approximates to nothing.
in
vi
PERSONAL ECONOMIES
elastic,
61
persons are equally
the cuts from
them
will
be proportioned to their normal purchases. The method of direct restriction will be examined in
detail in a later chapter.
When
down
it
takes the
form
of
maximum
rations,
it
cuts
the consumption
only of those persons who used to consume more than the permitted ration. The method of duties
has the advantage that, as between two equally

rich people, one of whom has an inelastic for one thing useful for war, say petrol,
demand
and the
other an inelastic
demand
for
it
another thing of
first
a bigger cut in steel, instead of forcing, to the common injury, equal cuts, or equal rations, in each of these
similar usefulness, say steel, to make a bigger cut in petrol,
allows the
man
and the second
things indifferently on both of them. As between two persons of different wealth purchasing the same
thing
it is,
however,
less satisfactory.
In the
first
well known, all specific duties upon place, o strike commodities of wide consumption tend to
as
is
ith rich poor people very heavily as compared with ftf f differpeople, because they do not take account of
ences of quality. There is, therefore, a danger that a large use of the method of duties would involve an unfair burdening of poor people. This
danger could, no doubt, be obviated by a judicious compensating arrangement of direct taxation. But, in the second place, there is a danger that, even if the aggregate tax burden thrown upon poor people is not made unduly large, poor people will be forced
consumption away from the particular things subjected to duty to an extent that injures
to divert their
62
WAR
CH. vi
them more than it helps the government. The method of direct restriction, on the other hand, can
be applied in such a way as to leave the consumption of really poor people untouched. This is a strong argument for the method of direct restriction, even when government control over prices is not
attempted. When control is attempted, the of duties is obviously not applicable, and the of restriction alone is in the field.
method method
CHAPTER
VII
IN the preceding chapter it has been made clear when a government has got hold of a given volume of purchasing power, the mass of things and services useful for war, which it will be able to obtain with it, will be greater, the more the public economises in the purchase of these particular It has been indicated that the sort of things. economy desired can be stimulated by propaganda, the imposition of duties, or some form of direct
i.
that,
restriction
upon
be observed method. Instead
It has now to private purchases. that there is also available another

of,
or in addition to, putting pressure upon private people to divert their consumption from services and things which it wants, the government may, by direct process, assure to
itself
its
own requirements
leaving to
and
services,
balance as
may
of particular things other people only such remain over after those requirements
have been
satisfied.
There are
It will
which
this
can be done.
first,
several ways in be convenient to
consider them,
as applied to flows of annually 63
64
WAR
CH.
produced goods, and, secondly, as applied to stocks of productive instruments and agents. 2. For flows of annually produced goods the most effective device is for the government to make itself the sole dealer, to reserve for its own use what
it requires, and, thereafter, to arrange a plan for distributing among the public what is left over. When the commodity is produced at home, the govern-
itself of the whole supply by commandeering, and it is open to it to fix the price that it will pay at what it considers reasonable, subject only to the knowledge that, if it fixes it too low, supplies may dry up. Thus, the British Government took over for several years, at an arranged price, the whole of the wool crop of the country and the whole
ment can possess
of the wheat crop. It also commandeered all available timber supplies. For imported commodities
government
is,
of course, less free to fix

it
its
own
cannot compel foreigners to sell to it. But, by forbidding its citizens to trade in certain foreign goods, it can, none the less, make
itself
purchase price, because
the sole dealer.
The
British
Government
did this for imported wool, for jute, leather, numerous metals, and, by the end of the war, for practically all the common articles of food. It kept what it
wanted
own needs, including, of course, the of the army, and, by means of priority provisioning certificates and rationing, arranged for the distribufor
its
tion of the balance.

will
These methods of distribution be studied in later chapters. 3. In so far as a government wants for war exactly the same classes of goods that civilians
vii
65
normally want in peace, pretty much all that is necessary can be done by dealing in the way I have been describing with the annual inflowing stream
In fact, however, a great part of of production. the war needs of governments differs from the peace
needs of civilians. Consequently, as has already been explained, what is wanted is, not merely a transfer of certain things from civilians to government, but also a transfer of productive resources from certain employments to certain other employments. There is thus an opening for commandeering productive instruments and agents. Of this there are two degrees. First, the whole of any or agent may be sort of instrument particular commandeered secondly, only such proportion
;
government wishes to turn directly to may be commandeered. The first sort of commandeering was applied in the United Kingdom immediately on the outbreak of war to
of
it
as the
its
own
service
the railway system of the country, and, later on,
it
was applied to the engineering plant of the country, In the earlier the coal mines and the flour mills. part of the war, the second less complete form of commandeering was applied to the mercantile
marine,
a
certain
number
of vessels
being
re-
quisitioned by the government at blue-book rates, while the rest were left to the free use of their
owners. Later on, however, practically the whole of the mercantile marine was commandeered.
4.
So
far attention has
ductive instruments.
been confined to proProductive agents also were

Acts.
commandeered under Conscription
All
fit
66
WAR
CH.
males of military age, other than those exempted on some urgent ground, were compulsorily enlisted in the army. There was talk at one time of extending this method to persons other than males of military age and for purposes other than military In the United Kingdom the strong dislike service. felt by manual workers for anything that could be called industrial conscription prevented this from being done. But the right to compel men of military age to join the army was used as a lever to divert those who were not so taken into the channels along which government desired labour to flow. Lists were made of non-essential occupations, into which men of military age were not allowed to
'
'
go without the leave of the Minister of Munitions,

and, over against these,
into
which they were

1
of essential occupations directly urged to go in the

lists
national interest.
5.
For home-made commodities or the services

or agents of production resident
of instruments
here,
commandeering can accomplish what no
system of limitation of private people's purchases can do. It can cut off the rival demand of
For example, before the war a large part of the British mercantile marine was engaged in the carrying trade, outside of this country It altogether, between certain foreign countries.
foreigners.
would not have been possible
to rope in the services
of these ships for things helpful to the war merely by forbidding British citizens to make use of them.
1 Cf. Hammond, British Labour Conditions and Legislation during the War, p. 131.
vii
67
They might still have gone on working for foreigners. So, too, might a number of British engineering firms and makers of woollen goods. Of course,
the
government,
instead
of
commandeering
or
controlling ships or factories, might have prevented them by direct order from working for foreigners.
But, once this sort of control is introduced from the side of production, as distinguished from the
side of purchase,
some steps on the way towards have commandeering already been taken. for home products and 6. Again, domestic instruments and agents of production, a policy
of commandeering has the advantage of permitting a limit to be set on the prices that producers are
allowed to charge.
To
limit price in sales to govern-
ment alone without commandeering would inevitably drive sellers away from government and to limit
:
price to other purchasers as well as to

to great uncertainty as to
it
government
without commandeering would subject government
how much
of the things
wanted
it
could obtain, because, as will
shown
presently, for commodities
be produced under
competitive conditions, an effective limitation upon If, price renders distribution the sport of accident. however, price limitation for things in large govern-
ment demand
is
impracticable apart from
com-
mandeering, this constitutes a strong argument in favour of commandeering. In a minor war, the
material
and human requirements of which are
small, the damage resulting from failure to limit But in the world prices is not likely to be grave.
war, had the government been forced to buy
all
68
it
WAR
CH.
needed in a free market, it could have demanded and so secured, at national terrifyingly high prices, It is true, as was fabulous profits. expense, that in this would not have out V., Chapter pointed meant directly any addition to the real expenses or for these consist in services real costs of the war and things, not in the payments made for them. But it would have meant an enormous addition to the money expenses of the war, and this would have involved probably a further expansion of credit and currency, and, certainly, a great increase Both these things, as will be in the national debt. shown in later chapters, have a very evil aftermath.
people in a position to sell to
:
the services and things
7.
is,
The dominating advantage of commandeering however, different from anything mentioned
It enables the transition from peace production to war production to be effected much more speedily than would be possible without it.
so far.
A policy confined to collecting purchasing power from the public and spending it on things needed The for war would not achieve its end quickly. transition that has to be made from one set of
industrial operations to another is very large. If the government relied merely on financial methods,
out of the purchasing power in its hands, higher prices than ruled before for the things it needed, while the prices of things with which private persons dispensed in order to provide
it
would
offer,
'
for their taxes and loan subscriptions would in tend, consequence of the diminished demand, The resultant increased profitableness of to fall.
money
vii
69
producing the sort of things government wanted and diminished profitableness of producing other things
would cause a change-over of productive resources from other things to government things. This is
the general process of industrial transition in response to changes in the flow of effective demand. Such a process is bound to be gradual. People and capital equipment will not be shifted across at once from the depressed to the expanded forms of production.
Friction,
crastination, imperfect
the general tendency to proknowledge of present facts

all
hold them back. Many manufacturers, for example, of things not wanted for war, thinking, as they are sure to do, that the war will be short, will hesitate to adapt
and future prospects,
will
work-people to new to the manufacture they of their former products, with the idea of holding these in stock until peace returns. Yet again, work-people who used to make non-government
their
works and train

will
their
tasks
keep them
things,
on being thrown out of employment through
the contraction of demand, will tend to stay where they are, instead of moving to other employments which are booming, in the hope of a rapid return
normal conditions. Finally, when the effective manufacture of government things requires special training in new processes to be given to work-people or special plant to be set up, private enterprise, even if it is tempted to provide these things at all, which, in view of its knowledge that the war may end before they have yielded their profit, is doubtful is sure to provide them In an intense slowly.
to
yo
WAR
CH.
vn
international conflict, however, delay is extremely dangerous. Time is of the essence of victory.
The moulding
for
of industry into the shape proper
war
will need, therefore, if the conflict is severe
enough, to be helped forward by direct government

coercion of industry.
CHAPTER
VIII
TAXES VERSUS LOANS
IN normal times the resources needed by government, apart from the payments made in fees for postal or other direct services, are obtained through In a well-ordered State, for ordinary taxation. is no question of any other arrangethere expenses ment except as a purely temporary makeshift. For
i
.
government to continue, as a regular practice, to finance part of its ordinary charges by borrowing would mean the piling up of an ever-growing debt,
such that the annual interest alone would eventually exceed the annual expenditure on behalf of which
it
It is, therefore, a generally accepted was incurred canon of sound finance that ordinary expenditure
!
schools, the maintenance of the army must be financed footing, and so forth
the assistance of poor persons, the upkeep of on a peace
by taxation
and taxation
2.
alone.
When
exceptional
it is
expenditure
for
undertaken
to loans.
common
has to be governments to resort
the sense that
If the expenditure is remunerative, inj it is expected to yield a money return

71
72
it
WAR
normal
CH.
rate,
adequate to pay interest upon
at the
If,
however, the is not at the same while remunerative, expenditure time it is exceptional and non-recurrent expendiloans are resorted to exclusively.
ture, for example, that is incurred in pulling down a slum area the issue between taxes and loans is
Of this type of expenditure war exmuch the most important instance. The question how far such expenditure should be financed out of current taxation and how far out of
less
clear.
penditure
is
voluntary loans has been the subject of prolonged debate and was vehemently discussed in many
countries during the progress of the Great War. 3. On two points there is, in this country at
least, fairly
far as loans are
general agreement. First, if and in so employed to finance war, new taxa-
tion ought to be imposed at the same time at least sufficient to provide the interest incurred under
the loans.
For otherwise not only
is
confidence
in the financial stability of the State liable to be
wrecked, but also the conclusion of the war would be followed by the paradox of increased, rather than, as the public would naturally expect, diminished,
taxation
;
and
this
Secondly,
at all events in a
would lead to great discontent. war on the scale of that
which recently closed, it is generally agreed that a policy of finance through taxation alone, however excellent it might be in theory, is in practice out of
the question, for the simple reason that people would not stand it. Hence, the phrase taxes versus
loans,
with which this chapter
is
a sharper antithesis than
we
really
headed, suggests have to face. In
vin
TAXES VERSUS LOANS
73
a great war there must, in all ordinary circumstances, be both some new taxation and some loans. The
extent to which resort should be had to one or other
of these things cannot be determined without detailed reference to current economical and psychological
All that can be attempted here is to set out in a general way the relevant considerations. to clear away a 4. At the outset it is necessary current confusion. It is widely believed that, in
conditions.
war is financed out of taxation, the economic burden involved in it is borne at the time, whereas, in so far as it .is financed out of loans, the burden is thrown forward on to the future. This is a misso far as
conception.
No
doubt,
when
a warring govern-
ment borrows from abroad, its citizens escape the need of making real payments now, in exchange
and their descendants to But the main bulk of war loans are necessarily raised at home. As between these domestic loans and taxes there is no such
for pledging themselves
later on.
make them
In clear-cut contrast as public opinion supposes. the of which out sources the several IV. Chapter
real
war fund of
a country
must come were enumer-
It was shown that resources ated and distinguished. obtained by extra work and by economies in personal expenditure come, in the main, out of income and
hit the present only,
whereas resources obtained by from new investment, by letting equiprefraining ment run down, by selling property to foreigners and so forth come out of capital and hit the future.
When a
given sum of money is raised by the government from anybody, and he does not shift the task
74
it
WAR
CH.
of shouldering
that
on
to
somebody
else,
the choice
he makes between these various sources is not determined by the form in which the levy is made upon him. It is open to him to meet the claims of taxation out of capital and those of loans out of income. The size of the contribution he
is
called
upon
to
make
is
much more
it.
important
factor than the
form of
it
in determining the sources
from which he
5.
It
elects to provide does not follow from
this,
however, that
the choice which the government makes between taxes and loans has no effect at all upon the choice
the public
effect the
make between drawing upon income and drawing upon capital. The question, what, if any,
government's choice does in fact produce, is an interesting one and deserves to be studied in some detail. Let us begin by supposing that the loan contemplated as an alternative to taxation is not a voluntary, but a forced, one, and that it will take from each individual exactly the same sum as, under the rival plan, would have been taken
from him
in taxes
is
and
let
us suppose further that
given to understand that, of the taxation required to pay interest and sinking fund on the government debt created by the loan, he will a proportion exactly equal to his have to
each lender
proportion
provide of loan
holdings.
It
is
possible
to
imagine a
world in which the levy of a forced loan on these terms would have the same effect as the collection of an equal sum of money by taxation.
To
tell
man who
country where the
rate of interest
expects to live for ever, in a is always 5 per
vni
cent, that
TAXES VERSUS LOANS
75
1000 now, is aphe must surrender proximately the same thing as to tell him that he will have to surrender 50 a year from now onwards for ever. Or, to put the point otherwise, to take from him 1000 now in taxation is approximately the same thing as to borrow from him 1000 on a
that the
loan of 5 per cent, at the same time informing him 50 interest to be paid on his loan will be
collected every year by that amount of taxation levied on himself. I have said that these two
things are approximately, and not exactly, the same, because the loan plan would leave the 1000 in our
citizen's possession
and thus
this
available to fall back
upon would be deprived of

carry
in an emergency, while,
on the tax
plan, he
our
supposition
it
stand-by. further and
But, if abolish
we
all
economic
friction, appear that our citizen could not make use of his 1000 for an emergency
will
without sacrificing 50 a year in interest afterwards, and always apart from economic friction if he were prepared to do this, he could, on the rival 1000 for the emergency. On these plan, borrow
suppositions the two plans would work in exactly the same way, and no one who understood what
was being done would act otherwise if confronted with the one than he would do if confronted with
the other.
6.
Let us
:
now
world
and,
is
first,
return by degrees to the actual let us reintroduce economic
friction.
of view
What this means from the present that, when a person has collateral to
is
point
offer,
even though he
subject to extra taxes equivalent
76
on the
securities
it is
WAR
CH.
to the interest
sents,
which
this repre-
practically very
much
easier for
him
to
borrow from bankers, not merely in an emergency, but on any occasion, than it would be otherwise.
He
is,
more hurt by
therefore, likely to consider himself slightly a tax than by an equivalent loan

:
and he may, in consequence, make slightly greater efforts to meet the impost by harder work and by
economy of consumption. In view, however, of the fact that most people rich enough to be subject
to large levies have already ample securities, which, at need, they can pledge or sell, this effect is
probably too small to need serious attention. 7. A more important consideration is as follows. In practice, when a man is forced to lend 1000 at 5 per cent, it is not possible to decree that the 50 required annually to pay him his interest shall be taken in taxes from himself. The tax system may be designed to effect this object, and may succeed
in effecting it at first. But taxation cannot be worked by way of poll taxes it must be based on some objects income, expenditure, commodities or what not. Hence, whenever any given amount of
;
tion of
future taxation has to be provided for, the porit that will fall on any particular individual
cannot be determined beforehand. It will depend roughly on the ratio at the time between his income
this ratio is liable to
and the aggregate income of the community, and be modified, not only by what he does, but also by what other people do. The tax method of raising money, therefore, means to
any
citizen the loss in after years of the interest
vin
that he
TAXES VERSUS LOANS

would have received on the money he
:
77
is
forced to give to the government the (forced) loan method means the loss in after years of an amount
of taxation, which
may exceed
or
fall
short of this
to constitute
sum, according
as his
income comes
a larger or a smaller proportion of the aggregate national income. This necessary looseness of con-
nection between the loan burden and the future

taxation that a lender will have to
meet towards
providing his
own
interest leads to too little attention
being paid to the debit side of the account under
People in general may, thereto be think themselves considerably fore, expected less hard hit under the loan plan than under the tax plan. Consequently, they will be appreciably less keen to meet the call upon them by economies in consumption and increased output of work. So
far as this
the loan method.
will
happens, the capital of the community be depleted appreciably more under the loan plan than under the tax plan, and the real income of the country accruing in future years will suffer
in proportion.
8.
we have supposed the loan plan to be by way of a forced loan taking from each citizen exactly the sum that would have been taken from him under the tax plan. In actual practice,
Hitherto
carried out
however, loans are generally voluntary, and large subscribers have good reason to hope that the interest on their holdings will exceed the contribution in taxes which they will have to make to provide this interest for experience has never yet
;
revealed
tax
system
graduated
for increasing
78
WAR
CH.
incomes anything
like as steeply as loan subscriptions are likely to be graduated, at all events when the loan required is large. Hence, the richer
classes,
is
from whom, when
a large
amount of money
wanted, contributions under any plan must chiefly come, will think, and rightly think, that a loan hits them much less hardly than equivalent
taxation
to
would do.
They
are, therefore, less likely
be induced to check consumption or to work more strenuously, and more likely to subscribe to government only such resources as they would otherwise have invested in industry. Consequently, the check to the provision of work and It appears, therecapital will be more serious.
justified.
popular instinct is in some measure Finance by loans does hit capital and, through this, the economic fortunes of future generations somewhat more hardly than finance by
fore, that the
taxes.
9. Moreover, it is not only through the immediate impact upon capital that loans made now Finance by taxation press upon succeeding years. means a single levy and thereafter, nothing. Finance
,
by loans (whether voluntary or compulsory) carries with it, unless the strong remedy of a capital levy is applied, a prolonged aftermath of taxes to pay interest and sinking fund on the loans. It is true
that these taxes, being paid over to domestic holders of war loan, will represent merely transfers of
purchasing power within the
any using up
of real resources.
country, and not But, though they

will,
will not directly
absorb real income, they
none
vin
the
that
TAXES VERSUS LOANS

less, indirectly lessen
79
the volume of real income
comes
into being.
For, being long enduring
and foreseen, the expectation of them must, as will be argued in detail in Chapter XVI I., in some measure check industry and saving so long as they last. The raising and spending of large loans in war
time may, therefore, when indirect as well as direct effects are taken into account, hit the future with This is an important result. considerable severity. It does not, however, constitute a decisive argument
It would only do that if against finance by loans. and all hitting of the future were necessarily bad hold since wars are that, waged, many people
:
partly at least, for the benefit of the future, the future ougfit to bear a substantial share of the burden
they involve. 10. A second relevant consideration in the choice
between taxes and loans
is
their comparative effect
in leading to an expansion of bank credits, and so In Chapter X. the policy to a general rise of prices.
of credit creations on behalf of government as a means of war finance will be examined, and will be shown to lead to many undesirable consequences. Exactly the same consequences will follow if,
instead of the credits being created directly for government, they are created for private persons who use them as a means of making the payments to
government that are due from them. Now, both under the tax system and under a loan system it is
some
possible for people to resort to credit creation to extent. There is reason to believe, however,
that, if a given
sum
of
money has
to
be contributed
8o
to
the government, the
contributor
WAR
is
CH.
to
likely
resort
more
payment
largely to credit creation for a loan than for a tax payment. The reason is
partly that, as already indicated, under the loan method he does not feel himself to be so hardly
hit, and is, therefore, less keenly impelled towards harder work and greater personal economies, and partly that loan scrip is excellent collateral on which banks will be ready to lend him money.
This
consideration
tends pro
tanto
against
is
the
policy of finance by loans. ii. third relevant consideration
the com-
parative effect of finance by taxation and finance by loans upon distribution. As between people
\of
equal wealth in different situations, there is a strong practical argument in favour of voluntary loans as against taxes. Under voluntary loans
those persons tend to subscribe

least difficulty.
who can do
so with
Of two men,
for example, of equal
wealth, one of whom is halfway through the building of a factory when a loan is raised, while the other
has no special call on his income, the second will naturally take up a much larger share of the loan. Under the tax method both these men would be
contribution, and, though would probably be able to arrange things somehow by borrowing himself, yet, unless he happened to have a considerable amount of suitable collateral, he might find it very difficult, expensive and inconvenient to do this. Under the loan method, those who have free money contribute it naturally and simply under the tax
forced to
the
make the same

builder
factory
viii
TAXES VERSUS LOANS

it
81
method
may have
to
be got from them through an
elaborate roundabout process of loans made by them to people subject to the levy but lacking free money
of their own.
When money
is
suddenly needed to
finance a war, the relatively small disturbance and agitation, which voluntary loans are likely, for this reason, to cause, is a clear point in their favour. 12. After all, however, the main problem of
distribution in a State levy
is,
not to organise
it
conveniently as between people of equal wealth who happen to be differently situated at the moment, but
to organise it fairly as between people of different grades of wealth. The fundamental point is this.
The amount
of resources which
government by from the poor margin among them is, both for individuals and for the poor as a group, small. Consequently, when a has sum to be raised in, large say, a single year,
it
it is possible for a to in a short time draw any plan is strictly limited. The available
is
necessary that
by
far the greater part of
it
shall
be raised somehow from better-to-do people. Furthermore, it is plain that, generally speaking,
as
we
pass
up the
scale of wealth, every increase
in an individual's
income means, not merely an increase in the available margin of resources, but an increase which grows more than in proportion to the growth of income. If one man is twice as
rich
as
another,
other
is
available
margin
things being equal, his not twice as large, but more
than twice as large.
by the
Hence, of the money needed must provide, in one way or another, more than the poor man, and the very
State the rich
man
82
rich
man more
WAR
CH.
;
and the amount provided must

proportionately,
creases.
than the moderately rich man increase, not merely but progressively as wealth inthe practical choice was between
Now,
if
the provision of money in these proportions by taxes and by loans the distinction between compulsory
and voluntary loans is here irrelevant the revenue pay interest on which would afterwards be assessed on the different classes in these same proportions, there would be no difference between the distributional effects of the two plans. But, if the above italicised condition is not appended to the
to
fact, that
loan plan, there is a very important difference. In condition is very unlikely to be fulfilled.
Taxes afterwards are likely to be assessed on poor people in substantially larger proportion than their contribution to war loans. Hence, whereas the tax method throws on rich people at the time a larger share of the war burden than they are
accustomed to bear of ordinary national charges and does nothing else x the loan method, while
operating similarly at the time, arranges, in effect, that these rich people or their successors shall
afterwards be partially compensated for their large immediate burden by moneys extracted in their interest from poor people. Looking at the matter a and fairly long view, we may say taking broadly that under the tax method rich people will bear a much higher proportion of the war charges than under the loan they do of normal peace charges
;
proportion somewhat, but probably not much, larger than that.
method they
will
bear
vni
13.
tical
TAXES VERSUS LOANS

The
83
bearing of this conclusion on the prac-
comparison between finance by taxation and finance by loans depends on our opinion about, what is the right relative distribution of war burdens and normal peace burdens. Two considerations are relevant here. First, when, as in normal times, what is wanted is a regular annual revenue, it is
natural to
income.
,
base taxation in a general way upon But, as will be argued in detail in Chapter
XVII. when
a single and entirely abnormal expenditure has to be met, ability to pay is best reflected, not in the income that happens to accrue in that
particular year, but rather in income-getting power, or capital this term being taken to include objects of wealth not used in trade, such as houses and
and also the capitalised value of a man's mental and manual powers. 1 Since 100 of earned income,' being terminable with life, represents much less capital than 100 of income derived from the funds, and since funded and other property
pictures,
* *
'
of course, suggested that the costs of a war can capital, in the sense that a person's holdings of land or factories or railways (except so far as they are saleable abroad in return for income ') can actually be used for war purposes. The source of the funds raised must be the None the less, it would be possible real income of the country. for the government to collect a large part of what is required
It is not,
be paid for out of
'
for
war from persons who have no income at all but only 1000 were taken from such a person, he would If property. 1000 worth of property 1000 have, in effect, to buy with worth of real income from somebody else and to hand this over to the Government. He would be the subject of the
tax,
though
his property
would not be the
source of
it.
(Cf.
ante, Ch. IV.)
84
is
WAR
CH.
held predominantly by the rich, this considera-
tion suggests that war charges ought to be thrown upon the rich in a greater proportion than the principles appropriate to peace taxation would warrant.
Secondly, there
is
a general feeling that, in a pre-
eminent national emergency, the call from each should be for his utmost rather than for his share.
Men
are required to give of their physical strength, not in equal proportions, but from each his all. There is no question of proportionate sacrifice between men of fuller and emptier lives. Indeed, the strong are taken and the weak rejected. It is difficult to see what ground of equity there can be
for
any different distribution in the summons to

;
But this is certainly not the financial strength. distribution aimed at in the ordinary tax system
and, therefore, some departure from the principles that underlie that system seems to be called for. 14. It is plain that the general trend of the
various considerations set out so far points towards the financing of war by taxation rather than by
(domestic) loans. There remains, however, a final consideration of a different colour, which must give us pause. If all wars were .very short, and the
funds needed for them could be raised at one single blow, what has been said above would be applicable without qualification. But, in fact, wars may last
for a
is
number of years. When this happens, or there fear of this happening, the tax plan acts, not merely through the fact of it at the moment, but
also
through the expectation of its continuance during the war. Just in so far, therefore, as it is
vin
TAXES VERSUS LOANS
85
thought by the people subjected to it to hit them more severely than loan methods would do, the
knowledge that a large part of the fruit of any exertions they make will be absorbed by the State may, in spite of the patriotic stimulus that wars provide,
seriously lessen their current exertions.
Had
that
part of the expenses of the Great War which was defrayed out of domestic loans even apart from creations of bank credits been defrayed instead
out of taxation, not only would the standard rate of income-tax have had to be enormously higher than the 6s. level which it actually attained, but a
mass of other taxation on the top of income-tax and excess profits duty must also have been imposed. Such a state of things continuing for a number of years might have led to a serious depletion of that real income of services and goods from which alone the real war fund can be drawn. This, to a statesman caring above all things to ensure victory,
great
or, at the worst, avert defeat, is a consideration of
supreme importance. It explains and, in the opinion of some persons not unqualified to judge, excuses what many economists deemed the undue hesitation even of the British Government in the use of taxation to finance the Great War.
CHAPTER IX
THE TECHNIQUE OF VOLUNTARY LOANS
i
.
IN the Great
War
it
was very important
for the
British
Government
it
to
make
:
its
voluntary loans
as productive as possible
for, failing
an abundant
response,
its
would have needed
either to cut
down
military expenditure, thus endangering the war position, or to have fallen back on the risky experi-
ment of compulsion, or to have on credit creations, with their
upon prices and distribution. was had to a number of indirect measures designed
to swell the flow of loan
relied more largely injurious reactions Consequently, resort
money
were
to the Treasury.
positive,
Some
2.
of
these
measures
others
negative.
The most
of high
offer
interest.
obvious positive measure is the For the sake of future
budgets every government will be disinclined to put the rate very high. To some extent their unwillingness to do this is unjustified. For, in so far
as the alternative to high interest on war loan is the creation of more bank credits, this creation
means
raised prices, which, in turn, 86
mean
a larger
CH. ix
THE TECHNIQUE OF LOANS

;
87
and capital debt on given government purchases future budgets may be just as much burdened by a larger debt at lower interest as by a smaller debt
at higher interest. Against high interest rates there is, however, a serious political objection. One
country dares not offer loans at a much higher rate than its opponents in war, for, if it does, public opinion in neutral countries may suspect its financial
view the sometimes found real terms on which a loan is offered, so that only persons concerned with business will understand them. Thus, advantages may be given, not in the nominal rate, but in issue below par value, in
it.
strength, and neutral to take sides against

it is
governments are more
likely
'
this point of * desirable to camouflage
From
premiums on repayment or
the matter of taxation.
in special privileges in
3. It is also possible to increase the attractiveness of loans, without any improvement in the actual terms offered, by so adapting their method
and form
Thus,
with
as to appeal to a
wide range of
tastes.
in the
Great
War
there were offered
war
savings certificates to
accumulated
years,
be repaid in a lump sum interest after an interval of
several
long-dated war loans, short-dated bonds and six or twelve months' Treasury Exchequer
the
bills for
money market.
'
Spectacular loans to
be subscribed for between definite dates alternated with continuous borrowing by means of Exon tap/ Great efforts, chequer bonds always in short, were made to render the government's
'
'
securities suitable for all classes of investors.
88
4.
To
these methods there
is
WAR
CH.
added
in war-time
the special appeal to patriotism. This may take the form of propagandist advertisement through
newspapers,
stimulation
public meetings, tank weeks, the of competitive endeavours among different towns to break one another's record of
subscriptions, and so on. Appeals to patriotism are not, however, by themselves apt, in the monetary
sphere, to prove very productive.

to
tell,
It
is
difficult
'
for example,
how
'
far
tank weeks
really
yield money, or how far they merely cause money to be subscribed in a particular way or at a particular
moment, which would in any case have come in to the Treasury somehow. 5. Negative methods of stimulating the flow of war loan consist in cutting off from private people alternative methods of employing their money. The available alternative methods are (i) buying
new output
of capital
goods, such as plant or

;
machinery or raw material (2) buying new output of consumable goods and services, such as food or travel (3) handing over money and the right to
;
it to other people in exchange for existing properties or for promises of future interest payments. Since the persons to whom money is handed
dispose of
over in this
it
last
into
war
loan, only
put of capital
way can in turn, if they do not put buy with it either new outgoods or new output of consum-
able goods, these two sorts of purchase are ultimately the only alternative employments for money
loan. Direct negative methods of the flow of war loan consist, therefore, stimulating
besides
war
ix

in greater
89
in blocking up, channels.

6.
or less degree, these
first sight it is natural to suppose that, if are compelled to reduce their expenditure people on any single sort of article, the fund available for
At
war loan subscriptions

some extent.
it
is
necessarily increased to
is
This, however,
not so.
Though
must follow that more of the particular article, on which expenditure is retrenched, will be set
government,
aggregate
free for
sum
of
need not follow that a larger money will be set free. If the
it
purpose which a prohibited or restricted article serves is very urgent, and if it can also be served more or less by some other article that is not
obstructed,
prohibition
or
restriction
will
press
purchasing power towards this rival article. If people do not much care about satisfying the purpose, and if the rival article is more expensive and inconvenient, no great volume of productive resources will be directed to it, and the resources secured by withdrawal from the prohibited or restricted article will be almost entirely a net saving. But, if people care a great deal about the purpose
which the State

satisfying
it
is
somehow
obstructing, they may insist on at whatever trouble and cost

;
and it may then happen that the roundabout method, to which they are compelled to resort, actually absorbs more productive power and costs more money than used to be needed before. A good
illustration is afforded
by the imposition of duties
upon certain classes of imports unaccompanied by excise duties on analogous products (e.g. rival types
90
WAR
CH.
made at home. Instead of causing people to employ less capital and labour, represented by less money, for the need they used to of these satisfy by importation, the imposition
of motor car)
duties
may
cause
them
to satisfy their
need through
increased manufacture of analogous home products at a greater aggregate cost in capital and labour,
to
sum of money, than used be required to make exportable goods with which to buy the imports. It is not true, of course,
represented by a greater
that the prohibition or restriction of selected articles is bound to fail in checking the aggregate volume of
resources, and their representative devoted to private service. But it
is
money, that
is
is
it
true that
much more
likely to fail than people
and govern-
ments generally understand, and that, if it is to succeed, great care must be exercised in the choice and grouping of the things selected for State discouragement. 7. This, however,
is
not
all.
There
is
a large
of different types both of capital goods and of consumption goods. If, therefore, the routes leading to only a few of these are blocked up,
number
however
small
for
skilfully
part extrudes from
of
the
these few are selected, only a money which the blocking

is
them
:
likely to
become
available
war loan
it follows that, in ordinary peace conis little use in restricting other openings there ditions, as a means of stimulating the flow of resources to
among From this
the main part will be scattered other employments that are not restricted.
a particular opening
for in these conditions
it
ix
91
would be
ings.
feasible to restrict only a very few openIn war, however, restriction can be applied
so
widely that a single non restricted opening, namely war loan, may expect to reap a great part of the fruits of it. Thus, in the Great War private
expenditure on capital goods was blocked up by a strict limitation, through priority certificates, of the
purchase by private persons of a number of imand private expendiportant structural materials ture on consumable goods was similarly blocked by rules about rationing and by restrictions, made necessary by the shortage of tonnage, on the im:
portation of
8.
many luxury and semi-luxury
articles.
So
far attention has
been confined to
direct
negative methods of stimulating the flow of war loan. There are also available indirect negative methods. As was indicated in section 5, it is open
with money, not merely to use it himself, also, alternatively, to hand it over to somebody In modern communities a substantial else to use. of their annual part money income is handed over by the recipients, either immediately or at one or more
to a
man
but
removes, to persons intending to buy new output of capital goods with which to develop industrial concerns in this country, or to persons desiring to
export goods abroad for capital investment there. If the handing over of money to these persons is obstructed, the original holders of the money,
though they may be led to spend some of what they would have handed over ,m extra personal consumption and some in buying capital goods for such of them as have their own private businesses,
92
WAR
CH. ix
use for
private businesses yet are unlikely to find a ready much of it in these ways, and may, therefore,
be expected to turn a good deal of it into war loan. In the Great War the British Government took Investment of capital advantage of this fact. abroad was cut off altogether by Treasury Order, and investment in the outlying portions of the
Empire was severely restricted. People were also forbidden to raise capital for investment in the United Kingdom without a licence from the Treasury,
and that licence was only granted if the investment was such that a good case could be made out
for permitting
it.
CHAPTER X
i
.
WE have now to
method of war
ant
consider the remaining importfinance, namely, finance by the
bank credits. This system of finance, supported by abnormal issues of fiduciary notes, was largely resorted to during the war in all the principal
creation of
belligerent countries, including the United Kingdom. I propose in the present chapter to describe and
discuss our national variant of this
In that way
it
will
common method. be easy to exhibit the general

war finance
*
principles that are involved. 2. It is customary for critics of British

to
make use
It
in connection with
is,
it
of the term
in-
flation.'
find any
factory. flation is
definition of this
however, exceedingly term that is

definition
difficult
to
at all satis-
One popular
an increase in
asserts
that in-
money more than proporthought to imply that purposes
tionate to the
1
1 accompanying increase in production.

is
This definition
incidentally
"
inflation is inherent in the flotation of a loan for
other than the construction of material reproductive capital," the idea being that, when the loan is employed productively,
93
94
WAR
CH.
Since, however, this definition compels us to say that a bad harvest involves inflation, it is too far
out of touch with the
common
understanding of
words to be admissible. An alternative definition associates the term inflation with that part of the rise
of prices that is consequent upon governmental interPractically, howference with money and banking.
it seems impossible to disentangle this part from the part that would have taken place, particularly in war, if the government had allowed monetary affairs to proceed along the usual lines.
ever,
Furthermore, the notion of governmental inter" ference with money and banking is not precise.
Certain government acts, of course, clearly constitute such interference, but certain others for example, the commandeering of foreign securities to
"
support exchange and propaganda to persuade people not to present currency notes for encashment are
doubtful.
Again, certain things, which cannot take
place in England without very definite government interference, are permissible in other countries under the ordinary law. Thus, the fiduciary note issue of
the Reichsbank might, under pre-war legislation, be increased beyond the normal maximum on condition
that a tax
these considerations
was paid on the extra issues. In view of it would appear that the only
extra things are created to offset the extra money. Obviously, however, no more extra things are produced at the time when
a factory
is built, or even than fireworks or guns. More extra things are, no doubt, produced later on when the factory is
built than
when
house
when people
are set to
work
to
make
begins to operate, but this fact
is
not relevant.

way
to
95
really satisfactory
these lines
would be
make an
of defining inflation along arbitrary schedule
of the various sorts of action, which, for the purposes of the definition, are to be regarded as governmental
interference with money and banking, and the of which, therefore, are to be called inflation. when we are driven to an artificial plan of this there is much to be said for abandoning the
altogether,
fruits
But,
kind,
term and in the following pages I shall only use it under the protest of inverted commas. 3. During the Great War, and particularly during the earlier stages of it, the government, whether rightly or wrongly, were unwilling to push overt taxation beyond moderate limits, for fear of checking production and rousing powerful resentment. They were equally unwilling to put the rate of interest offered for war loan subscriptions above a moderate amount, lest our reputation for financial
power should be damaged in the eyes of the world. As a result of these two things, the amount of money
obtained by overt taxes and public loans fell in most weeks considerably below the exigent demands of the army, navy, air force and munitions establishments. Given these conditions and given the determination to cut our cloth according to our coat and
not vice versa, the only course open to the govern-
ment, apart from direct resort to the printing press, was to fill the gap between income and expenditure
by causing the banks, and
particularly the to create credits in its favour. England, methods of doing this were available.
4.
Bank of
Several
that
The most important
of
these
was
96
WAR
CH.
described in the First Interim Report of the

:
Com-
mittee on Currency and Foreign Exchanges, 1918, " in the following terms Suppose, for example,
given week the Government require 10,000,000 over and above the receipts from taxation and loans from the public. They apply for an advance from the Bank of England, which, by a book entry, places the amount required to the credit of Public Deposits, in the same way as any other banker
that
in
credits the account of a customer
him temporary accommodation.
when he grants The amount is
then paid out to contractors and other Government

creditors, and passes, when the cheques are cleared, to the credit of their bankers in the books of the
Bank of England in other words, is transferred from Public to Other deposits the effect of the whole transaction thus being to increase by 10,000,000 the purchasing power in the hands of the public in the form of deposits in the joint stock banks, and the bankers' cash at the Bank of England by the same amount. The bankers' liabilities to
;
'
'
and
10,000,000, depositors having thus increased by their cash reserves by an equal amount, their
proportion of cash to liabilities (which was normally before the war something under 20 per cent) is x The banks are then in a position to improved."
do any one of three things without making the proportion between their reserves and their liabilities any smaller than 20 per cent. Having got 10
millions
1
more
reserve and also
10 millions
more
Interim Report of the Committee on Currency and Foreign Exchanges, p. 2.
97
deposits, they may either (i) credit their customers with a further 40 millions of deposits, which these customers, we may suppose, devote to taking up Treasury bills or war loan or (2) themselves take up out of their balances with the Bank of England 8 millions of Treasury bills or war loan or (3) lend
; ;
the spare 8 millions of their balances to the Bank of England, to be lent by it in turn to the government.
If the
first
of these methods
is
adopted the
millions
immediate
result is as follows.
The 40
extra deposits are transferred to the government's account at the Bank of England, thus, for the moment, reducing bankers' balances there by that amount.
At the same time these 40
millions cease to count in
But the bankers' deposit liabilities to customers. government forthwith expends the credit it has thus
obtained, so that the 40 millions are again added both to bankers' balances at the Bank of England
and
to bankers' deposit liabilities. The final bankers' balances at the position then is as follows Bank of England are 10 millions more than they
:
were before the original 10 millions of credit were created, and bankers' deposit liabilities to customers
50 millions more, while the government has spent and owes 10 millions directly to the Bank of England and 40 millions indirectly to the banks through their
customers.
ate result
second method is adopted, the immediis that the banks have 2 millions more balances at the Bank of England than they had
If the
before
10 millions
bills
more Treasury
more deposits and 8 millions or war loan. The government,
98
WAR
CH.
however, forthwith spends the 8 millions of balances been transferred to it, and these, therefore, appear again as an 8 millions addition both to
that have
bankers' balances at the
Bank
of England
and
to
bankers' deposit liabilities to customers. thus have a second stage, with bankers' balances at the
We
Bank of England again 10

deposits
millions
up and bankers'
;
18 millions up. The bankers have thus still a too favourable proportion they only need one-fifth of 18 millions out of their 10 millions
now
Bank of England balances, and are, therefore, in a position to take up a further 6f millions Treasury bills or war loans. When the government spends
the balances with which the banks do this, a third step bankers' balances at the
:
;
we have
Bank of
England 10 millions up bankers' deposit liabilities 24f millions up. It is obvious that this process will continue until eventually the bankers have taken up 40 millions of Treasury bills or war loan, and are
left
with deposits of 50 millions against balances at
the
Bank of England of 10 millions. Thus, this method leads in the end to the same result as the
other method, save only that the government debt of 40 millions on Treasury bills or war loan is a direct debt to the banks instead of an indirect debt
to
them mediated by their customers. On the third method distinguished above the
banks lend their 8 millions of spare balances to the Bank of England to be lent by it to the government.
On
this plan the 8 millions
come
back,
when
the
government spends them, both into bankers' balances at the Bank of England and into bankers' deposits
;

as
99
is
and the same process
on the second method
carried through, with the final result that bankers' balances are 10 millions up and bankers' deposits 50 millions up. The government's debt of 40 millions
(in addition to its original 10 millions
debt to the
Bank of England)
this
is still
a debt to the bankers, but
time mediated, not through their customers, but through the Bank of England. Thus, all three
methods come in the end to exactly the same thing. 1 There is an original creation of 10 millions credit from the Bank of England to the government, and a subsequent creation of 40 millions from the other
banks, which, in one or another way, is made available to the government, the two creations together involving an addition of 50 millions to the deposit liabilities of banks other than the Bank of England,
based on an addition of 10 millions to their holdings " of cash in hand and at the Bank of England." 5. Credit creation may be initiated otherwise than by a draft of 10 millions on Ways and Means
from the Bank of England.

1
The government may
It
has been suggested that, at one period during the war,
some of the banks counted the debt due to them from the Bank of England on account of their loaned balances as " cash in hand and at the Bank of England," and not as money at call or short notice, and so included it in the reserve on which
their proportion is based. Obviously, if they did this, they would be in a position to lend a literally infinite amount to the Bank of England for reloan to the government without
for each million reducing this proportion below 20 per cent of balances thus transferred would, after it had been spent by the government, appear as a net addition of a million to
;
how
deposits and also to reserve. There is no means of far, if at all, this policy was in fact adopted.
knowing
ioo
WAR
bills
CH.
or
directly ask for subscriptions to
Treasury
war loan from the banks (other than the Bank of England). The banks draw on their balances at the Bank of England to the extent of, say, 10 millions, and buy Treasury bills or war loan. These balances
are restored to their former level so soon as the are increased
government spends the 10 millions, but the deposits by i o millions Consequently the pro.
portion of banks' reserves to liabilities is diminished. To restore this proportion, they may call in their
loans to customers to an extent equal to their 10 millions subscription to Treasury bills or war loan.
customers simply do without the loans thus in, the banks' deposits are brought back to the figure at which they stood originally, while the bankers' balances with the Bank of England are also
If the
drawn
at their original figure.
But,
if,
as will almost cer-
tainly happen in fact, the customers go to the Bank of England and it finds money for them, they will
draw cheques on the Bank of England and so infrom the Bank of and the the balances at once at deposits England, the Bank of England of their own banks. If this
crease, to the extent of their loan
.
10 millions, it involves a 10 millions increase in bankers' balances at the Bank of England, and it, therefore, enables the banks to lend a further 40
loan
is
millions
to
the government in Treasury
bills
in
addition to the original subscription of 10 millions. It works, in fact, exactly in the same way as it would
have done had the 10 millions Bank of England credit been created for the government instead of for private customers of the banks.
x
6.

:
101
The bankers, alternative is open. to Treasury millions asked to subscribe being 40 bills or war loan, are able to do this without either
Yet a third
cutting
down
their loans to customers or
weakening
their proportion, if they can
add
million to their
reserve against each extra

liabilities.
To make
5 millions of deposit this possible, the government
may
sell
to the bankers
10 millions of currency
notes, to be held by them in their tills, in for 10 millions of their balances at the
exchange
Bank of
by
the net
England.
The
balances
thus
its
obtained
government come back to the when the government spends

result
is
credit of the bankers
money.
The
an increase of 50 millions in their deposits

;
and of 10 millions in their cash in hand and at the Bank of England the government having raised 40 millions on Treasury bills and 10 millions in balances at the Bank of England, against a sale of 10 million notes to be held in bank reserves. Once again, therefore, we reach substantially the same position as before. For, from the point of view of the bankers, balances at the Bank of England and currency notes for banking reserves are on exactly the same footing. Both may be regarded indifferently as a step towards, or as a condition of, an
aggregate credit creation of five times their
own
amount. If the government wishes for 50 millions of bank credits, it is a matter of indifference whether it provides the basis for this by getting a Ways and Means advance of 10 millions from the Bank of England or by selling 10 million notes (to be held
as reserve) to the banks.
io2
7.
The
the
WAR
it
CH.
in
form
creation of additional purchasing of bank balances, whether
power
is
brought about by one of the processes described above or, as happens more ordinarily, by an expansion in the 'proportion of liabilities that banks (other than the Bank of England) venture to hold
against their reserves, tends to promote a more or less corresponding rise of prices. Normally, under
effective gold standard such as existed before the war, this rise of prices, by encouraging imports and
an
discouraging exports, turns the exchanges against us and threatens a foreign drain of gold. At the same time it makes it necessary for people to carry
more money than before in their pockets and tills for the payment of expanded wage bills and for the conduct of retail business on the higher
rather
in their
price level.
In this way
it
sets
up
a domestic drain.
These two drains together, by lessening the reserve of the Bank of England, compel the Bank to raise its discount rate and to take steps, by selling government stock or otherwise, to make the new rate
effective in the market.
The higher rate tends to check borrowing. If it does not actually do this at first, it will have to be raised still higher until it does do it for, otherwise, the Bank would see its
;
reserve
The financing of completely exhausted. any customer, the government or anybody else, by the creation of bank credits is thus, in normal times,
held closely in check. In the Great War the posiThe government had tion was entirely abnormal.
to finance itself whatever rate of interest
pay.
High
discounts, therefore,
it had to would not have
x
stopped

the
credit
103
machine from expanding. had been applied or not, the they on its loans, and insisted must have government the gold reserve of the Bank of England would have continued to fall, had no safety-valve been It is opened, until the machine was smashed.
Whether
true, indeed, that the external drain normally consequent upon credit creation could not manifest
itself.
For the export of gold by private persons
was
sufficiently provided against by the submarine peril and the refusal of the government to insure
gold cargoes.
But, unless a further basis of cash
had been provided by direct State action, collapse must have come about through the internal drain. As the Committee on Currency and the^ Foreign " The greatly increased volume Exchanges observe of bank deposits, representing a corresponding
:
increase
of
purchasing
power,
and,
therefore,
leading, in conjunction with other causes, to a great rise of prices, brought about a corresponding de-
mand
for legal tender currency, which could not have been satisfied under the stringent provisions of the Act of 1844. Contractors were obliged to draw their accounts in order to discharge cheques against itself enhanced on account of the their wage-bill 1 rise of prices." No doubt, had gold been flowing into the country as the result of an abnormally
favourable trade balance, as it was in fact flowing into the United States during certain of the war
the required basis of legal tender money would, up to a point, have been provided without
years,
1
Loc.
cit.
p. 5.
io 4
WAR
CH.
any special State action. In these conditions bank credits could have been created in behalf either of the State or of private persons, and prices forced up, without any risk to the banking and monetary
The foundation of the pyramid would have been enlarged, as it were, by automatic process. But in European countries, except at the very beginning of the war, the tendency was towards an outflow, rather than towards an inflow, of gold. Hence, the required basis of legal tender had to be provided by other means. To this end in the United Kingdom currency notes, designed in the
system.
early days of the war for the quite different purpose of parrying a possible hoarding drain on the part of
the public, were issued by the Treasury in conIt has already been tinually increasing quantities.
explained how the sale of. currency notes against bankers' balances, to be held by the banks as reserves,
would operate.
We
are
now concerned with
the
sale of notes required by bankers to meet the cash demands of their customers. The effect of this sale
of notes
against balances plus the resale of the notes by bankers to customers against deposits was ultimately, after the government had spent the
leave both the bankers' balances at the
balances obtained in exchange for the notes, to Bank of
England and bankers' deposits the same as before. The government obtained new purchasing power
equal to the value of the notes sold, but these notes, entering as they did into circulation among the
public, did not constitute a basis for further credit creations in the way that notes sold to banks and
105
held by them as reserve did.
In substance, there-
fore, the sale of notes against balances for passage
into public circulation, while incidentally adding something to the purchasing power of government,
was, in the main, a device for preventing the pyramid of credit from being broken up under the pressure of an internal drain. Their issue enabled the banks
meet the cash requirements of their customers, consequent on the high prices for which the pyramid of credit was responsible, without causing a drain
to
upon the banking reserve of the Bank of England. " Given the necessity for the creation of bank credits in favour of the Government for the purpose of financing war expenditure, these issues could not be avoided. If they had not been made, the banks would have been unable to obtain legal tender with which to meet cheques drawn for cash on their
customers' account.
The
unlimited issue of cur-
rency notes in exchange for credits (belonging to other bankers) at the Bank of England is at once
and an essential condition of the methods which the Government found it necessary to adopt in order to meet their war expenditure."
a consequence
8. It is a
matter of some interest to determine

the very complicated method of for the government that I
how
far, if at all,
obtaining
resources
have been describing has different effects from those that would have been produced by a straightforward issue of currency notes in direct payment
for
1
the
government's
purchases.
Apologists of
and
First Interim Report of the Committee on Currency
the Foreign Exchanges, p. 5.
io6
WAR
CH.
fact that the printing press
war finance have made a great point of the was not used in this way and that notes were only issued in response to business demands. At first sight it seems that this complacency is justified. For, on the plan actually adopted, the government's credits have been obtained in the form of bank balances, and notes have only been issued to support these balances whereas, if government had simply created notes to pay for its purchases, these notes would have formed a basis for a very much larger creation of bank credit. This distinction, however, rests upon the assumption that, if the government had issued
British
:
notes in direct payment of its purchases, all the notes so issued would have remained, as it were, " alive." This assumption is not justified. If the
government in any week had created and paid to contractors 10 million one-pound notes, the contractors presumably would have deposited these
notes with their bankers, only keeping in their own hands for wage payments the same number as, on the plan actually adopted, they drew out of their account for this purpose. The joint -stock banks in turn would have deposited these notes with the
Bank of England, thus creating balances to their credit there equal to the balances that, on the other
plan, they
would have created by book
transfers,
and, equally with them, available for the purchase So soon, however, as currency of Treasury bills. notes enter the Bank of England, they are auto-
To make our matically cancelled and die. parison a fair one, we must suppose that this
comsame
x
rule
107
would hold good under the printing press plan. But, if it holds good, that plan, though it would involve the creation of many more notes than the
would only involve the survival of an approximately equal number. The only difference would be that the balances of bankers at the Bank of England, instead of being created by simple book transfers, would be brought into being through the agency of extra notes marked for destruction, which,
actual plan,
in their brief span of life, accomplished nothing except to bring those balances into being. The
printing press method, combined with the proviso that in the atmosphere of the Bank of England no
live, is thus, contrary to common in its operation and consequences identical opinion, with the more roundabout policy that was in fact
currency note can
pursued by the British Treasury. 9. Let us now, having studied the mechanism,
consider the essential character of these methods of war finance. Plainly, the creation of bank credits,
whether for the government directly or for private people who have taxes and loan subscriptions to make to the government, is a mediating, not an
ultimate, operation.
Its effect is to give the
govern-
ment more purchasing power, and thus to deplete the real value of the purchasing power left to private In this way it enables the government persons. to get possession of more things and services, and
so constitutes, as against the public, a concealed form of taxation. This taxation, moreover, is not
graduated in any degree and not adjusted in any degree to the size of a man's family. It is simply
io8
WAR
CH.
proportional to income without even an allowance

to very poor people of a tax-free minimum of subsistence. This kind of taxation is generally acknowto be exceedingly unfair and oppressive to ledged
the poor. too
But that
is
not
all.
Besides drawing
of what the government needs from the as poor compared with the rich, finance by bank credits also causes a large transfer of real income
much
from one
set of people (mainly the receivers of fixed incomes) to another set of people. This incidental disturbance is similar to the disturbance brought about by protective duties on agricultural produce,
which, besides causing the consumers of imported produce to make a payment to the Treasury, also
causes the consumers of
a
home produce
to
make
persons ultimately to the owners of agricultural land at home. Some part of the shifting of distribution can, no doubt, be corrected by adjustment in the rates of payment made for various services. Thus, wage-earners
payment
to
private
can
insist eventually
on a
rise of
money wages more

of prices.
or less
conformable to the
rise
But
everywhere the process of adjustment is bound to involve much friction and some loss of production
through industrial disputes and, for some persons, e.g. debenture holders as against the holders of ordinary shares, no adjustment is possible at all.
;
clearly show that, on the side of distribution, finance by the creation of bank credits is much inferior, not only to ordinary taxes, but even to ordinary loans. 10. It may perhaps be thought that, if, as has just
These considerations
109
been claimed, finance by credit creation is, in effect, though of a peculiar kind, it should at least be credited with the superiority which that form of finance was shown in Chapter VIII. to possess over loans as regards immediate depletion of capital and ultimate discouragement of productive energy.
taxation,
lead to a
by credit creation may well somewhat smaller drain than finance by loans would do on material capital. But, since it must strike especially hardly upon the poor, it is
certain to lead to a
It is true that finance
much
greater drain
upon
that
immaterial capital which is comprised in the strength and efficiency of the people. Little, if any, real advantage, therefore, can be looked for here. Much
the same thing is true as regards the ultimate disFinance by couragement of productive energy.
been shown, indirectly involves such discouragement, because loans imply continuing taxes to provide interest and sinking fund later on finance by taxation does not. The paradox of credit creation, at least on the British plan, is that, though, from the point of view of the public, it corresponds to finance by taxation, from the point of view of the government it is, in large part, finance
loans, as has
:
bearing loans. So far, indeed, as balances for the government at the Bank of England are obtained in direct exchange for currency notes,
by
interest
no
interest has to
be paid.
So
far
as they are
obtained under
Ways and Means advances from
the
Bank of England, interest is paid at a more or less arbitrary rate, which must not exceed 5 per cent. So far as the creation of credits at the Bank of
no
WAR
CH.
England and their transfer to the balances of other bankers enables these bankers, on the basis of their
existing
proportion,
to
increase
their
loans
to
government through the purchase of Treasury bills, interest at the current rate for these bills has to be
Thus we get three items balances bought paid. with notes on which there is no interest balances obtained by Ways and Means advances on which the interest is limited balances obtained by the
: ; ;
a sale made possible by the creation of a legal tender basis for further bank credits on which full interest has to be paid.
sale of
Treasury
bills
The interest accumulating under the two latter heads accrues to the banking system of the country as a reward for its work in collecting, as it were, a
forced levy on the public in behalf of the government. The payment of it necessitates taxation in
the future just as the payment of interest on an ordinary loan does. Pro tanto, therefore, in accordit
ance with the reasoning in Section 9 of Chapter VIII., must make against industrial energy after the war
is
over.
ii.
On
tions
it is
the strength of these various consideragenerally agreed that, though the creation
may be a convenient means of war meeting requirements at an early stage, before there has been time to organise an adequate scheme of taxation and public loans, yet, even apart from its aftermath of monetary and exchange complications, to which reference will be made in a later chapter, the method is inherently bad, and a government at war should restrict it within the narrowest
of bank credits
in
possible limits. As was indicated, however, in the third paragraph of this chapter, the fear of popular
resentment against high taxation in an overt form and the fear that an offer of very high interest for loans might make upon neutrals an impression of financial weakness are likely to compel even strong governments to resort to it in some measure.
CHAPTER XI
PRICE CONTROL
control
am not concerned with price over monopolists, whether public utility concerns or others, but with control where the
i.
IN
this chapter I
factor
making for high prices is independent of monopoly. This kind of price control was unknown in modern times until the Great War. During the war it assumed great importance and covered a wide range. The purpose of it was to stop profiteeron the part of certain fortunately situated ing individuals against the general community more particularly in respect of things purchased from them by the government and of essential goods that
'
'
played a large part in the consumption of the poorer classes. Broadly put, the position was as follows. The war caused in two ways a great shortage in
certain things.
articles,
On
the one hand, for munition
army clothes and so forth, there was an enormous new government need much in excess
of normal supplies. On the other hand, for various articles of ordinary civilian use, the contraction of
available tonnage
and the withdrawal of labour for
CH.XI
PRICE CONTROL
113
the army and munition work caused supplies to fall much below the normal. The shortage brought
about in one or other of these ways put it in the power of persons who happened to hold stocks of short commodities, or to be able to produce them
quickly, to charge for them prices very much higher than usual. When the shortage was due to increased
government demand, the
scale of business
done by
these persons being as large as, or larger than, before, the high prices that they were enabled to
charge necessarily yielded them abnormally large

profits.
When
it
was due
to contraction of supply
(e.g. through the withdrawal of labour or other obstacles to output), the gain from high prices might be cancelled by loss due to lessened sales so that
;
abnormally large profits

a great
were not obtained.

of, say,
For
of
number of things, however, demand are such that a shortage
the conditions
10 per
cent in the supply causes the
price
offered
by
purchasers to rise by much more than 10 per cent. For the sellers of articles of this class the shortage,
even when it was due to a supply contraction, often meant abnormal profits. Of course, some of these abnormal profits were more apparent than real, for, if prices all round are doubled, a doubling of money
profits
will
only enable a
as
profits
amount of things
ever, the
before.
money
to get the same Very often, howwere enhanced very much
man
more than in proportion to the rise in general Wherever this happened, certain specially prices.
favoured
direct
were benefiting greatly as a of the war. This state of things consequence

persons
I
n 4 POLITICAL ECONOMY OF WAR

naturally caused resentment, interference.
2. It
CH.
and suggested State
war
clearly understood that the thing sentiment seeks to eliminate is not merely high
must be
profits.
In America, at one period of the war, a
profits tax was imposed based on the excess earnings of corporations above a defined percentage on their
capital, whether or not earnings as high as this had been accruing to them before the war also. This kind of thing is not relevant to our present problem.
That problem is to prevent fortunately situated persons from absorbing large war profits. We have nothing to do with the fact that, even in ordinary times, some individual producers in every industry, whether from superior ability or from luck or from
the ownership of a site situated specially near to good markets or railway facilities, obtain a much
Our objective is, not bigger profit than others. differences between the earnings of some producers
and of others of the same class in normal times, but differences between the earnings of the general body of people producing a particular thing on account of the war and apart from it. It may be said at once
problem of isolating these differences cannot be completely solved, because, within special profits accruing during the war, it is not possible in a general way though a rough allowance can be made for
that the
the
circumstances of
new
firms
to
distinguish
between those special
profits that are,
and those that
are not, due to the war. With a few reservations it is necessary to assume that they are all due to the war,
although
we know
that the assumption
is
not in fact
xi
correct.
cally
3.
PRICE
This
is
CONTROL
it
115
unfortunate, but
cannot practi-
be avoided.
When
the above assumption
is
made,
it
may
seem
seek
at first sight that what public sentiment will to prevent or restrict are war-time money
' '
exceeding (by more than a fair return on new capital that may have been invested) preany war money profits. Unfortunately, however, as has already been indicated, with general prices soaring upwards, a given money profit means a diminished
profits
real profit.
It is
made
for this.
proper that allowance should be natural suggestion is that this
could be done quite simply by multiplying the rate of money profit previously earned by the proportionate
in general prices. So far as profit consists of interest on capital previously invested, this is It is correct, too, so far as profit consists correct.
rise
of payment for the services of

forth.
management and
so
invested during the period when high prices were ruling the change in This change has already prices has no relevance.
for
capital
But
new
been reckoned in the face value of the
capital.
On
the other hand, if the general rate of money interest has risen, that change should, of course, be taken into account in formulating our standard of reason-
In practice, these complications cannot able return. be allowed for on any exact plan. Plainly, however, they ought to be allowed for so far as the information
accessible to government permits. So far as they are not allowed for, any method aimed at eliminating or restricting war profits is imperfect.
4.
Among
these methods the most obvious are
n6
the
WAR
CH.
method of excess (war) profits taxation and the method of maximum prices. Under the former
method,
if it
were employed by itself, fortunately would be left free to charge such prices as the market would bear, thus collecting abnormal profits in the first instance but would afterwards be deprived of the bulk of them, for the benefit of the Exchequer, by a high war profits tax.
situated sellers
;
Under
the latter
method the
prices that sellers are
allowed to charge would be limited by authority to rates at which it is estimated that abnormal
profits will not accrue to
them.
The
excess (war)
profits
method, enormously though it proved to is the war, open grave objection. It during normal of the motive for striving deprives producers after economical methods of production and tempts
fruitful
them
into
all
sorts of evasive wastes.
Moreover,
since an experiment that succeeds is not permitted to yield them a good return, while one that fails
will
must expose them to loss, the spirit of enterprise be checked. There is, however, a more decisive objection to allowing the excess (war) profits method to operate alone. Broadly and generally we may say that the choice between it and the maximum price method makes no difference to fortunately situated But it makes a great difference to the people sellers.
who happen
that these persons
maximum
need the particular goods or services sell. For, whereas under the are left untouched, under price plan they
to
the excess (war) profits plan a special levy is, in effect, placed upon them for the benefit of the general body
of taxpayers.
Where,
therefore, the taxpayers
them-
xi
selves,
PRICE
CONTROL
117
through the government, are the principal buyers, or where the public are buyers more or less in the proportion in which they are taxpayers, it does
not greatly matter which of the two plans is chosen. But, where, as in practically all articles of food, poor people play a much larger part, compared with rich
people, as buyers of an article which
is
short than
they play as taxpayers, it does greatly matter. For, if the State were to adopt the excess profits plan in preference to the maximum prices plan, it would be
relieving the well-to-do of a large block of taxation, and throwing it, by a roundabout and semi-secret
process, upon the shoulders of the poor. Whatever might be thought of the desirability of exacting a larger contribution from relatively poor persons,
a device of that kind
sequently, in the
field,
would never be tolerated. ConGreat War, over a large part of the
the excess profits plan could not practically
be made the main engine for preventing fortunately situated sellers from making fortunes out of the war. Resort had of necessity to be- had also to the plan of
objected in limine that the whole idea of price limitation as a means of helping the public apainst possible exploiters is illusory, because an enforced cheapening of one sort of goods
will
maximum prices. be 5. It may conceivably
merely lead indirectly to an increase in the prices of other sorts. If, it may be argued, the government forces coal-owners or farmers to charge less for their product than market conditions would allow, people who, in the conditions of shortage, may be presumed to buy the same quantity of coal or bread
n8
WAR
CH.
whether price is controlled or not will have more purchasing power left to them with which to buy
Consequently, the prices of other go up correspondingly and nobody will be really any better off than before. This argument is not, however, correct for it tacitly assumes that
other things.
things will
;
coal-owners and farmers will buy the same quantity of things for themselves, whether or not they are allowed to make special profits out of the general
This, of course, they will not be able to do. public. To forbid them to make profiteering charges means,
in short, that the share of the real
income of the
community under
their
the share under other
command is diminished and people's command increased.
No doubt, as a consequence of this distributional change, the relative prices of various sorts of goods will be modified but it is impossible that they should be modified so far as to wipe out the ad;
vantage which the changed distribution of purchasing power confers on the general public other than
those persons.
coal-owners and agriculturists at the expense of This is true whether or not any
indirect effects are
produced on the general moneIn fact, in the peculiar circumtary position. stances of the Great War freedom to sellers to exact
prices for things sold to the government forced the government to raise more funds by credit creation than would have been needed otheritself
enormous
wise
to
and restriction of this freedom led indirectly This state of a lessening of credit creation. to the a check upward movement of things implies
;
prices
all
round.
xi
6.
is
PRICE CONTROL
Government
restriction
119
of particular prices
not then a proceeding necessarily foredoomed to fail of its purpose, and it becomes important to consider the problem of working it out in detail.
In the attempts made to solve this problem in the United Kingdom during the course of the war a great number of difficulties emerged, which it will be well to set out in order. The first of these was
the difficulty of definition. The same name often covers a great variety of different qualities of article,
which
it
it may be extremely hard to disentangle in any formal schedule. When this condition prevails
is impossible to exercise control over prices by general rules, and it becomes necessary to fall back upon the cumbrous device of individual appraise-
Thus, under the Raw Cocoa Order of March, 1918, it was laid down that no raw cocoa might be sold except at a fair value,' this fair value being determined by a person authorised by
ment.
'
the
Food
Controller to determine the grade of the
The same plan was adopted end of 1917 for controlling the prices of cattle and sheep sold by live weight at market. Obviously, however, this plan could not be employed on a large scale, owing to the vast amount of labour that it
various lots of cocoa.
at the
involves.
Consequently, in general, some modifica-
essential, and some general classification of grades had, in spite of the openings for evasion that this permits, to be, in one way or
tion of
it
was
another, relied upon.
A second
difficulty,
when
the problem of defining
grades of quality was overcome, resulted from the
120
fact that grades
WAR
CH.
mere
were often very numerous.
The
task of fixing prices directly for a great variety of these might well be more than any authority, at all events in the earlier stages of its operation, was
prepared to enter upon. When there were only a few grades, it was comparatively easy, with the help of advice from experts, to do this but, when there were a great many, it was thought better to rely, not on a schedule of maximum prices, but on a general order determining the relations between the prices that might be charged in the future and those that had been charged in the past. An example of this plan was the Order of the Ministry of Munitions, issued in August, 1916, by which sellers of machine tools were forbidden, except with the sanction of the Minister, henceforward to charge prices higher than they were charging in July, 1915. An analogous difficulty had to be faced when a
;
commodity, about the grading of which, perhaps, there was no need to trouble, was produced under different conditions in a number of different
localities, in
would not
treat different
such wise that a single maximum price producers fairly. Here,
too, inability to construct a schedule as varied as the
circumstances required forced the controlling authority to fall back on the plan of fixing, not future
prices themselves, but the relation Thus, in prices and past prices.
between future May, 1917, an
Order was issued that no imported soft wood should be sold at prices above those that ruled in each several This locality in the week ending January 31, 1917. Order was subsequently modified as regards im-
xi
PRICE
CONTROL
;
121
ports from Scandinavia
but with that
we
are not
concerned.
has been tacitly assumed that the maxiprice aimed at for any one commodity of a given grade is a single price. For some commodities,
So
far
it
mum
however, no one uniform price ruling throughout the year is adapted to the conditions of their production and sale, and a series of maxima is needed.
Plainly,
series
is
more
difficult
correctly than a single price.
determine Consequently, here

to
again the controlling authority was driven to the method of regulating the relation between future
and past
Thus, in July, 1917, it was ordered prices. that the wholesale price of milk per imperial gallon
should not henceforward anywhere exceed by more than 6Jd. the price charged in the corresponding
a year before, and that the retail price per imperial quart should not exceed this corresponding The same plan was followed price by more than 2d. in the Price of Coal (Limitation) Act of 1915, which
month
decreed that no colliery company should charge a price exceeding by more than 43. (afterwards raised
to 6s. 6d.) the price charged similar date in 191314.
on a similar
sale at a
Plainly, all these indirect
of control
likely to
left
the
and roundabout methods way open for evasion and were

Consequently,
prove
difficult to enforce.
controlling authorities, as they got a better grip and better knowledge o f the conditions of various industries, tried to step forward to the
more precise method of maximum price schedules. More and more this became the predominant plan. The
122
WAR
CH.
producers' and wholesalers' prices of most of the more important articles of food came to be fixed
directly
by schedule, as were also the prices of most of the commodities controlled by the Ministry of
Munitions.
For most things
it
was found
sufficient
up a single schedule. But sometimes different producers' prices were fixed for different parts of
to set
the country. With bulky and heavy articles, unless this was done, there would be a tendency for the things to stagnate near the places where they were
produced. Hence, for hay, for example, Scotland was given one price, England another. Sometimes, too, a series of schedules was set up to apply to
different parts of the year. Unless this was done, people would be tempted to sell out all the supplies of things the production of which was seasonal
directly after the harvest, instead of distributing sales,
and so consumption, fairly evenly over the year. For potatoes the Order of February, 1917, fixed one price up till March 31, and another higher price after that date and for peas and beans an Order
;
of
May, 1917, fixed three prices, diminishing in amount for sales in June, July and later months.
Similarly for wheat, oats and barley, to be harvested in the United Kingdom, the Food Controller, in
August, 1917, fixed a series of prices rising gradually in each successive two months from November, 1917,
on
to June, 1918.
milk prices
made
fixing maximum a similar differentiation between

later
Order
different parts of the year.
It is plain that the direct
establishment of
maximum
prices
is, if
the appro-
priate prices can once be worked out
satisfactorily,
xi
likely to
PRICE
CONTROL
123
prove much more effective than any roundabout plan. So far we have only taken account of industries
sell
so simply organised that the producers
a finished
product direct, without any intermediary, to ultimate consumers. In most industries, however, there are several stages between the original material or service and the finished product in consumers' hands. This fact gives rise to further problems.
The
conditions of
being given,
demand for any finished product when a maximum price less than the
demand
price of the available quantity of any material or service used in making and selling it is
fixed, the price of the finished
product need not be lowered correspondingly, but it is in the power of any unregulated seller in a line between the provider
of this material or service and the
consumer of the
finished product to add on to his charges the equivalent of whatever has been knocked off the charges of
the regulated sellers.
Thus, if the price of coal at the pit-mouth were reduced by State action and nothing else were done, the only effect might be that dealers
in coal
would buy more cheaply while retaining the old price of sale. Again, if the price of cattle were forced down and nothing else done, retail prices might remain unaltered, while butchers and meat dealers gained enormously. Yet again, if freightrates
on imported materials were kept artificially low by government action, the various people who use these materials in their industries might get the whole benefit. Nor is it merely possible that this might happen. In general it would happen, except
124
on
WAR
CH.
in so far as the people
was thus
conferred, motives, or from fear of popular resentment, decided to forgo their advantage. 1 In order to prevent this,
power of exaction deliberately from patriotic

a
whom
the fixing of
maximum
prices at the earlier stages of
production had to be coupled with control over the profits which manufacturers or dealers at a later stage might make by adding further charges on to these One way in which this control was exerprices. cised was by limiting the percentage addition that
might be made by any
seller in the line.
In May,
1917, for example, it was decreed that no timber from Russia should be sold at an advance of more
than 10 per cent on the purchase price and in September, 1917, a schedule of prices for fish was fixed as between fish-curers and wholesale dealers,
;
and other sellers (with the exception of retailers) were prohibited from adding more than 10 per cent on to the scheduled prices. More usually it was
not the percentage, but the amount, of addition that was limited. Thus, under the Cheese Order of
August, 1917, first-hand prices of various sorts of British-made cheese were fixed as from the maker, and it was provided that no dealer other than the maker should add on to them more than the actual
charged for transport plus, in general, 6s. per cwt.
In October
1
it
was provided further that
retailers
This consideration may properly be urged by an individual producer if he is challenged out of patriotism to reduce his charges voluntarily below market level. He may rightly urge that for him to do this would merely put money into the pockets of dealers intermediate between him and the consuming
public.
xi
PRICE CONTROL
125
should not add on to the prices actually paid by them more than 2^d. per Ib. In the same month
of the various sorts of leather were on the same general plan. In like manner, regulated the price of horse and poultry mixture was controlled, in November, 1917, by an Order forbidding the maker to charge a price exceeding the cost to
the
prices
him
ton
;
i of his ingredients by more than los. per and the amount that other sellers might add
:
on was limited
more,
so on.
3$.
to is. per cwt. on sales of 6 cwt. and per cwt. on sales of from 3 to 6 cwt., and
in the first instance,
In meat a variant on this plan was adopted, on account of difficulties due to
among retailers of obtaining different proportions of their profit from the sale of different In an Order of September, 1917, it was laid joints.
the custom
down
that
meat by
retail at prices that
no person should in any fortnight sell would cause the aggre-
gate price received
by him
to exceed actual costs to
him by more than
a prescribed percentage (20 per
cent or 2|d. per Ib., whichever shall be less). In August, 1917, a rule on similar lines was laid down
for retailers of
It is
bacon and hams,
evident that plans of this kind for controlling the charges to be made at the later stages of a com-
same
modity's progress to the consumer suffer from the sort of disadvantage that roundabout attempts
to control producers' charges suffer from. They are liable to evasion. Consequently, the controlling
authorities sought, as they
their work, to evolve
became more masters of some more satisfactory arrangeis
ment.
One
stage in this evolution
illustrated
by
126
WAR
CH.
the Butter Prices Order of August, 1917. In that Order it was laid down that retailers should not add
to the price of butter sold by them more than 2|d. per Ib. above the actual cost of it to them ; but it
was provided further that
local
Food Control Com-
mittees might prescribe a scale of maximum retail prices in accordance with the general directions of
the Order (which includes rules about maker's, importer's and wholesaler's prices), although con-
formity with that scale should not relieve any retailer from the obligation not to add on more than
2|d. per Ib.
illustrated
by
slightly more advanced stage is the plan adopted for regulating the
retail prices
of coal.
The
general principle was laid
down
that retailers should not
add on to
their
own
purchase price per ton over and above the costs of actual handling and dealing with the
is.
more than
office
coal
(including
expenses
apart
trader's
left,
own
it
salary).
But
air.
this principle
It
from the was not
was provided that and inquiry, authorities, should work it out and apply it in the form of
as
were, in the
after
local
consultation
a definite
district.
list
Yet a further stage
of retail prices applicable to their is reached when the

lists
controlling authority itself fixes

prices
at
of
maximum
more than one point on the way from
producer to consumer. The Potatoes Order of September, 1917, was of this type. Maximum prices were fixed for growers wholesale dealers were forbidden to sell in any week at prices that yielded them more than 73. 6d. a ton beyond their total costs on
;
all
purchases of potatoes
costs
which varied with
xi
PRICE CONTROL
retail prices
127
the transport conditions of different districts
an elaborate scale of
was
fixed,
and which
related the permitted price per Ib. to the price per cwt., including price of transport, that the retailer
had
The
actually paid for different classes of potatoes. final stage is reached when definite schedules
are fixed throughout

retailer equally
for producer, wholesaler and the by controlling authority itself. This was the arrangement to which the Ministry of
Food
in
It was definitely attained steadily progressed. to British onions, most sorts of fish, regard
beef and mutton, jam and fruit for jam, peas and beans, hay, oats and wheat straw. Lest, through imperfect knowledge, the special circumstances of
particular districts should have been neglected in the construction of these scales, a safeguard was sometimes provided in the form of a rule empowering
local
Food
Food Committees, with the sanction of the Controller, to vary the maxima in their district.
This provision was introduced into the Order of

January, 1918, fixing
maximum
prices for rabbits.
was provided in an Order of September, 19-17, that, where the Food Controller or a local Food Committee was satisfied that, by reason of some exceptional circumstance, flour or bread
In
like
manner,
it
could not be sold by "

price
retail at
the
official
maximum
so as to yield a reasonable profit," a licence might be issued, either for the whole or for a part of any Committee's area, permitting higher prices to
be charged.
schedule of
The Order of January, 1918, fixing a maximum prices for most kinds of fish,
was made
subject, as regards retail prices, to similar
128
was
like
WAR
CH.
local revision, as
also the
Milk Prices Ord^r of
March, 1918. power of varying local retail of the Food Controller, sanction with the prices, was accorded to the local Food Committees under
the Potato Prices Order of September, 1917. Hitherto attention has been confined to com-
modities that
come
into the consumer's
hands in
much
the same form as that in which they leave the hands of producers. Further complications are introduced when we have to do with raw materials
that are
worked up
into elaborated finished articles.
Here, owing to the varying parts which the raw material plays in different types and grades of finished goods, it is not generally possible to fix
schedules of prices beyond the raw material. Consequently, for two important articles, boots and
clothes,
An
an ingenious roundabout plan was adopted. attempt was made to induce, or compel, manu-
facturers to devote a considerable part of their plant ' * standard articles to be sold at prices to making
calculated
on
a basis of conversion costs, in the
hope
that the competition of these articles in the market would indirectly keep down the price that it was
profitable to charge for similar articles that
standardised.
were not In boots, manufacturers were ordered

'
to devote one-third of that part of their plant which was engaged on civilian work to making standard
boots/ In clothes, no fixed proportion of plant was forced into making standard suits, but manufacturers were tempted to take up this kind of work
by
relatively favourable treatment in the matter of In cotton the quota of raw wool allowed to them.
xi
PRICE CONTROL
129
goods, though the price of raw cotton was artificially controlled, no corresponding control of the finished
commodity was attempted, the argument being that cotton manufacturers were sufficiently burdened by
having to provide a special levy to pay benefit to work-people thrown out of work by the reduction in the number of spindles and looms that they were allowed to operate. 7. Up to this point we have been concerned with matters of technique. We now come to a more fundamental issue Prima facie authoritative limitation of the price that may be charged for goods pro.
duced under competitive conditions
is
likely
to
check production. When something is being produced by a monopolist, who is charging for it more than the supply price of the quantity he is selling, such price limitation, by preventing him from seeking his gain by high prices, may force him to seek it through large sales, and so may actually stimulate production. But, for goods produced under competitive conditions, sellers could not in any event charge more than the supply price of the quantity
sold, and, therefore, limitation of price, at the
same
prevents the occurrence of abnormal profits, will cause output to be smaller than it would be if prices were left free. The reason, of course, is
time that
it
that,
there is a shortage of anything, it is just the prospect of high prices and high profits through The prospect of that the shortage corrects itself.
when
exceptional gains diverts free resources into the industry which is making the things that are short.
Cut
off this prospect,
and the associated increase of
3o
WAR
CH.
supply will be checked. Any practical policy of price There is no control must take account of this fact. as has been explained, of cutting already question,
any special
profits that
well-managed or fortunately-
situated firms were
making before the war, or of
striking at the differential
advantages they enjoy as other firms. The war profit that it is sought against to prevent or reduce is further profit due to the
high prices associated with war, in which, in general,
Nobody would suggest forcbelow the prices point at which this special ing war profit is done away. The true issue is how much higher than this they should be allowed to A little war profiteering is less harmful stand. a great deal of profitthan a large check to output eering is more harmful than a very small check. A government, which has decided in a general way to
all
firms
would
share.
down
'
'
cut
control prices, has to decide further how far them below the level that free competition
it
will
would
bring about towards the level that would yield the pre-war scale of profit and, in forming this decision,
;
it
has to balance the evils of various amounts of
profiteering against those of various degrees of check to supply.
the
any given cut in prices below level, which unfettered competition would bring about, depends on how elastic is the supply of the controlled article. The supply of imported goods, such as wheat and silver, is ex8.
The
effect of
'
'
natural
tremely elastic to this country, because there are many other markets open to the sellers of them
besides
the
United
Kingdom.
If
the
govern-
xi
PRICE CONTROL
to fix
131
ment attempted
maximum
prices for these

price,
things substantially below the ruling world
the supplies available to this country would be very greatly reduced. Consequently, as a matter of
practice, no attempt was made to limit the prices which foreign importers were allowed to charge for their goods the government, and any private person who was allowed to buy at all, paid the. price which market conditions, or, in some circumstances, the
;
control policy of foreign governments, determined. Home-produced articles with a large export market
would
also normally
have an
elastic
supply to pur-
chasers in this country, because it is possible to divert sales from domestic to foreign buyers. For
such things, therefore,

price
if free export is permitted, It is, however, impracticable. possible, as was done with British coal, to^ limit the amount of exportation that is permitted, and so to
control
is
do away with this source of elasticity. Moreover, in war time, even if no overt rule is made, export may be automatically limited by the dangers of the Yet again, there are many commodities which sea. have not normally a large export market, and for
which, therefore, the
elasticity of
supply of British-
made
is substantially to the of British elasticity production. equivalent 9. For these commodities, as, indeed, for all com-
stuff to
British
consumers
modities,
it is
further important to observe that the
elasticity of supply, or production, is not a single fixed thing. It, and the consequent check to out-
put which a given cut in permitted price may be expected to bring about, is different according to the
132
WAR
CH.
length of time for which the cut is imposed. A permanent policy of preventing groups of producers (other than monopolists) from charging prices that yield abnormal profits on occasions when the conditions of the market give them power to do so would certainly react seriously on production.
People, in making choice of investments, take account of the ups and downs, and, so far as their judgement is correct, place their resources in such a way that,
on the average and on the whole, the rate of yield works out about equally in different occupations. In these circumstances for the State regularly to cut down prices in any industry below the competitive level at times when, if there were no government
interference, that industry
might expect to enjoy

effect,
exceptional
profits
must, in
penalise
it
as
compared with more stable industries. For if, in a hilly district where the average level of peaks and
valleys
is the same as it is on a plateau, the tops of the peaks are removed, the average level there will be reduced below that of the plateau. Differential
action
checks the flow of resources that would
otherwise seek investment in building up the permanent equipment of the threatened industry. If,
for example, the State adopted a general policy of forbidding farmers to charge abnormally high prices
when
bad world harvests, this would in agriculture because people investment check harvests from time to time and bad world expect look to high prices then to set against low prices
there are
;
in
bumper
single
years.
to a
price regulation limited exceptional occasion, the position is,
With
xi
PRICE CONTROL
Thus,
if
133
there
is
however, quite different.
an
exceptional shortage in the catch of fish on a day when fish happen to be in great demand, a limitation
of price cannot interfere with the supply already caught, and, if it is understood that the limitation is
for
it will not interfere with fishing If the foreign supply of iron afterwards. activity ore is cut off for one year, and it is known that the
once only,
shortage will last for one year only, no practicable price would have called out a large increase in
domestic supplies over so short a period, and, therefore, limitation of price will not make much Yet again, if the short commodity is a difference.
thing like houses, of which the annual output is necessarily small relatively to the total stock, to limit
price for a short time, even
if it affects
production
In the substantially, cannot affect supply much. Great War the sort of price limitation aimed at was
evidently single, exceptional, and, it was hoped, for a short time only. Consequently, its injurious effect
upon production might be expected, even apart from

the stimulating effect of patriotic propaganda, to be
small.
10. In a general way the British Government endeavoured to fix their price maxima at levels that would not seriously reduce production below what it would have been in a market not subject to price regulation. This meant allowing charges that
yielded very substantial profits to producers profits which were afterwards in part absorbed by the Treasury under the excess profits tax. The method
of allowing a wide margin in the
maximum
price
34
upon
it
WAR
CH.
fixed
which
not, however, the only method by possible to prevent production being An alternasubstantially checked by price control. tive plan is to couple a comparatively low maximum
is is
price with the grant of a
bounty on that part of the
output which is produced with greatest difficulty and which, at the maximum price, it would not pay
For example, a maximum price normal profits on some and given estimated output might be established at the same time it might be provided that farmers should receive a bonus on any addition to the wheat crop above their previous output or, to get over the difficulty of harvest variations, on any addition to their acreage under wheat. In like manner, maximum rents might be fixed for work-people's houses, but on new houses built after some arranged
people to produce.
for
wheat calculated
to yield
date a subsidy might be paid.

this device
In industry proper
would, no doubt, be exceedingly difficult to administer. It is, however, worthy of closer than has study yet been accorded to it. An essential
point to keep in mind is that a bounty of the type here contemplated, designed to cancel the restrictive
effect
price,
on production of governmental limitation of is fundamentally different from a bounty
unaccompanied by any system of general price restriction. That type of bounty causes production of the bounty-fed article to be carried further than it would be under the working of competitive forces
;
the cancelling
price limitation from causing production to be carried less far than it would be under the free working of
bounty aims
at
preventing
xi
PRICE
CONTROL
135
This is a very important distinction. under both sorts of bounty the buyer of bounty-fed produce gets stuff, and pays for it,
these forces.
It is true that
say, ios., while the cost of production
is,
say, 155.
But, whereas, under the general bounty, if we ignore differences in wealth and taste among different
people, the ios. will measure the buyer's estimate of the benefit of the thing to him and the 155. the seller's estimate of its cost of production to him,
under the cancelling bounty ios., being a restricted price, does not measure the buyer's estimate of the This is measured by benefit of the thing to him. the 155. that, ex hypothesi, he would have given had there been no control. Hence, while there is a
presumption which may, indeed, in certain circumstances be rebutted against general bounties, there
is
a corresponding presumption in favour of cancelIf a cancelling bounty is given, the ling bounties. source the funds for it are taken, from what question
whether these are general taxes or excess profits duty raised from the industry making the commodity, or, as at one time happened with British coal, profits made on exports the prices of which are free from
control,
is
of secondary importance'.
CHAPTER
XII
is most rationing likely to call up in the ordinary mind in England is the fixing of maximum weekly rations for individual
i.
THE
idea
which the term
'
purchasers of certain foods. This type of rationing might, theoretically, be introduced without any ac-
companying price control, in order to conserve sufficient supplies of some important commodity for poor persons as against better- to-do persons, who would
otherwise force
there
is.
up the price and take nearly all that Of course, limitation by rationing, or in any
other way, of the purchases permitted to the wellto-do will, just like a limitation of price, indirectly cause the output of the commodity affected to fall
somewhat below what

ished production
is
it
But, at all events in short periods,
would otherwise have been. where dimin-
not likely to be associated with
increased costs per unit, the contraction of output will be smaller than the contraction in rich
people's purchases, and poor people will get more of the commodity at lower prices than would have been available for them in a completely free
136
CH. xii
It
137
that,
market.
must be remembered, however,
since the rich are relatively few in number, and since their consumption of common articles except
coal, the
size of a
consumption of which is regulated by the man's house and not by his bodily capacity
is a small proportion of the whole, a very large percentage cut in their per capita purchases would make possible only a very small percentage addition
to the per capita
consumption to the poor.
More-
over, against any benefit that might be obtained through this there has to be set a large adverse
balance of irritation and inconvenience, and, perhaps, of unavoidable muddling on the part of the superThe practical inference seems to vising officials.
be
that, in the
it
absence of a system of price control,
while
slightly to the general interest for well-to-do persons voluntarily to restrict their purchases of certain common articles in times of
may redound
in the present state of economic and administrative efficiency, it may knowledge do more harm than good for the State to force easily them to do this. 2. In fact, in the Great War, the rationing introduced in this country was designed to complement
shortage,
yet,
maximum prices so as to prevent that system from leading to chaos in distribution. If a commodity, the price of which is restricted, is being produced under conditions of monopoly, there is indeed, unlikely to be chaos in any event. For the State to enforce a maximum price less than monopoly price, but not less than the price that would allow normal profits, will have the effect of calling out at
the system of
138
more purchases
and
still
WAR
CH.
once
more output.
The
be equal to the that is demanded at the quantity being charged. price This quantity will, of course, be larger (and the price lower) than it would have been if the government had done nothing but there will still be
quantity available for sale will
;
equilibrium.
When, however,
under
commodity
is
being
produced
competitive
conditions,
maximum
prices, if they are to have any effect at all, must be fixed below the demand price of the otherwise, quantity that is being offered for sale
;
being higher than the prices that would have been charged naturally, they will be otiose. When, however, maximum prices for competitive goods are
established at a level below
free market, unless there
is
what would rule in a some system of rationing,
buyers as a body will be trying to secure at that price more stuff than is available for sale. In a free
market price so adjusts itself to the conditions of supply and demand that, at the price established, everybody gets exactly as much as, at that price, he
wants.
With the
fixation of
this
maximum
prices (for
competitive
regulation of 1 distribution is destroyed. Some people, therefore, must go short of what they want at the regulated
goods)
automatic
price.
1
Who
these people will be and

produced demand,
at intervals
how
short
When
a thing is
e.g.
the wheat
crop
prices would not lead to any unsatisfied demand so long as any stock remained ; but, unless a scale of ascending maxima were provided to make it worth while for sellers to hold back a part of their supplies
for a continuous
sale, it would lead to the still worse result of complete exhaustion of the crop before next harvest.
maximum
from immediate
xii
139
they will go depends on a mixture of accident, ability to arrive first at a place of sale and the possession or otherwise of
It is
power
to influence shopkeepers.
probable that rich people will, in practice, have an advantage over poor people, because, since they
are
more valuable customers, shopkeepers may be more anxious to oblige them. Realisation of this more
irritating
fact is naturally very irritating to
poor people than a knowledge that the rich are getting the stuff, while they are not, under regime of uncontrolled high prices and the desire to obviate
this source of irritation
may
play a part in deciding
politicians to adopt a policy of rationing in war time. As a matter of hard fact, however, as has already
been indicated, the proportion of the total supplies of any staple article of food (though, perhaps, not of household coal) that is consumed by rich people is so small that very little difference would be made to the poor if they were allowed to take all they
required. of price
Hence, the main objection to the system
maxima unaccompanied by
it
rationing
is,
not that
renders the fixation of
maximum
prices
valueless to the
rich,
mass of the population because the
through the exercise of various pulls, will sweep the market bare, but that it leaves distribution This chaotic within the mass of the population.
chaos
is,
at the discretion of
of course, tempered by unofficial rationing shopkeepers, who will try to

all
keep something for
for articles of a sort that people
their regular customers ; and, who fail to secure
supplies can fairly easily do without, perhaps chaos so tempered is a lesser evil than official rationing.
140
WAR
CH.
number
of articles, such as cheese, fish, potatoes
and eggs, were subjected during the war to maximum For the price regulation, but were not rationed. main staple articles of food, however other than bread, which was subsidised and the maximum price for which did not involve a demand in excess
of the supply maximum prices alone led to a to secure a share of the limited supplies so struggle
keen, and to suffering on the part of those who failed so serious, that social peace was threatened. Against
these evils rationing of staple foods was sought as a remedy.
3. When rationing has been decided upon, it becomes necessary to determine on what principle rations shall be allocated. A system can be imagined under which the fundamental thing aimed at should be equality of sacrifice among the different purchasers whose purchases have to be cut down. This system would involve some cut in the purchases even of the very poorest people, and would leave to rich people very much larger rations than were
allowed to the poor.
In a democracy, in a time of
stress sufficiently intense to warrant any form of If rationrationing, this would never be tolerated.
ing
must at least appear to fundamental end, namely, minimum aggregate sacrifice. This implies the allocation of rations in such a way that the last unit of commodity permitted to any one purchaser shall carry about the same satisfaction as the last permitted to any other, or, more broadly, an adjustment of rations based on needs rather than on demands.
is
introduced at
all, it
aim
at a quite different
xii
141
For some purposes, objective tests of these may be resorted to. Thus, in the Great War, for coal, gas
kind was sought rooms and the number of inhabitants in different people's houses. For food products rough tests of need are available in sex, age and occupation. Thus, supplementary rations of some things may be allowed to soldiers, sailors, heavy workers, invalids and children. Naturally, however, considerations of simplicity and
electricity
and
test
of this
in the
number and
size of
the cruder plan of making
administrative convenience point strongly towards mere existence the test
and allowing equal rations to the whole civilian For most purposes in the Great War it population. was felt that this plan was on the whole the least Of course, it is very far from unsatisfactory. " the proportions in which perfect. Normally, families of equal means use the different necessaries
'
of
'
life
distribute
In ordinary times they are very different. their expenditure among the different
necessaries in the measure
getting so on.
which seems best, some more bread, some more meat and milk, and
;
By equal rationing all this variety is done each household is given the same away with amount per head of each commodity allowances for age, sex, occupation and other things can only be
;
introduced with difficulty." l In British food rationing an attempt was made to meet these difficulties by various devices, as, for example, by the granting of special rations of butter and bread to vegetarians. At best, however, the adjustments made in this
1
Cannan, Economic Journal, December, 1917, p. 468.
142
WAR
CH.
way must be very rough.

it
may
For certain things be possible to adapt rations directly to
the special circumstances of separate individuals. For example, when a man wished, during the later stages of the war, to spend more than 500 on build-
when he wished to spend anything on structural steel in house building, he had to obtain a licence. The licensing authorities were thus, in effect, allowed to assign rations of building materials and labour varying with their judgement of the needs of individual applicants. Plainly, however, this plan would be administratively unworkable for the generality of ordinary
ing or redecorating his house, or
commodities. Rationing, if introduced at all, must be by general rules. Such rationing is hardly practicable on a large scale except for things that people are accustomed to buy regularly and continuously, and for which enormous divergences of need do not exist. Rationing of things like pianos and bicycles, or even of suits of clothes, which people buy at irregular intervals, would be exceedingly difficult. 4. All these things being understood, let us now suppose that it has been decided to introduce a
this policy will fail of its
policy of uniform rations of certain articles. Plainly, purpose if the rations are
fixed so high that, in spite of them, there is not enough of the rationed commodity to satisfy the
sum
of people's
demands
at the fixed
maximum
For then some people must go short, and price. there may still be battles in queues. It follows that, where rationing is introduced in conjunction with
xii
prices, the rations
all
143
maximum
the intention of enabling

rations to be satisfied.
must be allocated with demands within the

is
If a mistake
made
in this
matter, either the ration or the level of the controlled No government price must forthwith be altered.
would adopt rationing as a remedy against queues, and then frame its rationing rules in a way that prevented the supposed remedy from
in its senses
working.
Hence,
rationing
other
than
effective
rationing in this sense, though a theoretical possito be bility, is a practical monstrosity that is bound
stillborn.
This implies as a corollary that, if the available supplies are, for any reason, cut down in amount, the rations permitted will have to be
reduced correspondingly.
of course, if a government chose, it besides could, fixing maximum rations, also secure that everyone should wish to buy his full ration, by
5.
Now,
providing anyone in need with

like this
money to do so. in fact done in the was Something very Great War, not, indeed, as between individuals, but For the United Kingdom and as between States. the United States, by providing loans for France, Italy and other Allies, made it possible for them to take up the rations of imported wheat and other essential articles that were allotted to them by the Had it not been various inter- allied commissions.
' '
for these loans, certain of the rationed States could not have afforded to purchase their ration. Among
individuals there
allied loans,
is
and in
nothing to correspond to interfact many persons, on account
of poverty or competing purposes, could not afford,
144
or,
WAR
CH.
what for the present purpose is the same thing, did not choose, to take up their full quota of certain rationed articles. This circumstance complicated
the administrative problem a good deal.
known
in
that
;
some
but
it
potential
It was demands would not
materialise
was not known how extensive week these would be. It was necessary, any
therefore, for the authorities charged with regulating distribution to see that, in each district, there were always sufficient supplies to satisfy the maximum of
demands within the ration limit that experience showed were at all likely to materialise. This necessity meant that, on some occasions in some
places, the supplies were sure to exceed the ration demand. Out of this fact a difficult issue arose.
It is possible (i) to
maintain rigidly the rule that

or (2) to allow the whole,
nobody
shall
be permitted to buy in any week more

;
than the allotted ration
or a part, of any surplus created by the failure of some persons to purchase the full amount of their ration
be sold to people anxious to buy, even though they have already a full ration. Choice has to be made between these two plans. 6. Let us begin by considering a durable article
to
If the supplies are sufficient to allow like sugar. a total distribution throughout the country of, say,
15 million Ib. per week, it is plainly better to fix the ration at such a level that, at the regulated price,
the whole of these 15 million Ib. will be absorbed under the rationing scheme than to fix the ration lower than this and allow the resulting surplus to be distributed outside that scheme. For any extra-
xii
;
145
ration supplies could only be distributed
of accident, early inquiry or favouritism are apt to be even worse regulators than rules of
Practically the choice is between permitting surplus distribution and having a smaller ration, and forbidding such distribution and having
on a basis and these
uniformity.
is
a larger ration. Moreover, if surplus distribution there is danger of permitted, inequality between
districts. Rich people in poor districts will find themselves more liberally supplied, because there is a bigger margin of unpurchased rations allotted to the poor, than rich people in rich districts. Yet again,
there will be less inducement for producers and dealers to send stuff from districts where it is
plentiful to districts where it is scarce ; reckon to sell it as surplus in the district
it
they
may
it is
where
grown and so save the trouble and cost of sending

away.
The
the
result
may be
that in
some
districts,
unless
there
government very actively, not be enough supplies to satisfy demands within the ration. In principle, therefore,
intervenes
may
for durable goods no distribution of surplus outside the ration scheme should be allowed.
7.
To work
out this principle in practice
is,
however, technically rather difficult. If shopkeepers are merely required to sell no more of some article in a week than the official ration multiplied by the
number
to
of their registered customers, the supplies
be allotted to them are easily determined, and departures on their part from the law can be detected by simple methods. But, if their sales are to the above limited quantity minus such part of the
L
146
them
registration of customers
WAR
is
CH.
supplies allowed to
as their customers fail to
buy, mere
sufficient,
no longer
and
it
becomes necessary
to institute a
system of ration books divided into coupons. The shopkeeper's permitted sales are then measured for any period by the number of coupons he has To test obedience to the law it is, collected. therefore, necessary for officials to be appointed to count the coupons collected by an enormous number
of shopkeepers
;
and
Moreover,
it
is
bound
this is a serious undertaking. to be very difficult to pre-
vent coupons that one person does not use being transferred in one way or another for the use of
other people.
If the
coupon books are deposited
-with shopkeepers, they are free themselves, with the connivance of their customers, to arrange this.
with the connivance of the shopone purchaser may give or sell some of his keeper to another purchaser. When the sense of coupons public duty is keen, evasions of this kind may not, however, be practised extensively. Moreover, even a considerable risk of evasion may be worth accepting in preference to surrendering a sound principle. The practical inference seems to be that rationing schemes should be drawn up on a basis of absolute maxima, that some evasion of them must be expected, but that the controlling authorities, by inspection and, if need be, by prosecution, should endeavour, so far as may be, to keep this in bounds. 8. When we have to do with articles that are not durable but are liable to perish if not consumed
Alternatively,
immediately, the balance of advantage
is
inclined
xii
147
For then, since it is impossible to differently. secure that in every district every week the supplies shall exactly fit the rationed demand, if the surplus
were not allowed to be sold
it
would be wasted.
No
doubt, this danger could be minimised by skilful distribution of supplies among different localities.
Furthermore, when a surplus appeared in some district, it might be possible to dispose of most of it to persons who had not taken up the whole of This device, their ration by cutting prices sharply. to a difficult one would be however, apply systematically,
to hold
because, so applied, it would tempt people up their demand till the last moment, so as to
come in on the cut, and this would disorganise the whole system. Probably for this reason the device was not adopted in any English rationing scheme. Instead, when perishable articles were in question, provisional, and not absolute, maxima were fixed. Thus, if their supply of meat offals or of butter were not absorbed in any week by the rationed demand, retailers were allowed to sell the surplus to people whose ration was already complete. It was the
business of the central distributing authorities to see that surpluses of this sort were as small and rare as possible. It is interesting to observe that an
exactly analogous problem was presented in the rationing of ship space to different sorts of articles
:
for to forbid ships absolutely to bring in certain

relatively unimportant things might sometimes mean their return half empty, though a cargo of these
cargo,
things, not in any way was available.
competing with a more useful
148
WAR
CH.
we have tacitly assumed that 9. Hitherto, rationed commodities are all simple uniform things.
In
reality, of course, this is
not so.
The problem
which there
partial solution
has to be faced of
how to
treat articles of
are various grades of quality.
of this problem was found by fixing the ration in terms of expenditure instead of quantity. With
a simple thing when the price is given, the choice between a quantity ration and an expenditure ration
is
obviously
immaterial.
But,
when
there
are
several qualities, an expenditure ration enables purchases to be limited generally without dictation as
to people's choice of quality. Thus in England a ration ticket allowed the purchase of so much value
of meat, the different joints being priced according to an official scale. Had tea been rationed, the same
system would probably have been pursued. There is the difficulty, however, that, if the more expensive
owe their greater value to their taste, so that sixpence-worth has much less nutritive effect, everybody may be driven to demand the cheaper
qualities
varieties.
When
all
varieties
are
produced by a
joint process, as with meat, this will force a revision of the official prices if waste is to be avoided. More-
over, for commodities the prices of which vary with distance in time from the period of harvest, ration-
ing by expenditure means periodic changes in the expenditure allowance if the quantity ration is to
be kept constant.
10. Finally, a
word should be
said
on an im-
portant point in the technique of administration. When a commodity which it is decided to ration is
xii
149
handled by private dealers inside the country, it is extraordinarily difficult to prevent these persons from exceeding their allotted ration. This difficulty was very important in Germany during the war. The farmers who handled the main part of the nation's food supply, and who were very numerous, by refusing to stint themselves were free to starve the towns. So far as meat is concerned, be made to prevent evasion by rules attempts may
forbidding the private slaughtering of animals, but it is easy for a farmer, if he wishes to do so, to break these rules without being detected. When
supplies
are
mainly
imported
this
difficulty
is
relatively small.
Of
course, the various
middlemen
importers and buyers, e.g., butchers, shopkeepers and millers, may take too much of the
between
rationed article for their personal unless the government succeeds in
consumption,
account
this
itself
is
accurately
for
their
sales.
making them With meat,
hardly possible, even if the government buys cattle from farmers and sells to butchers.
are
But, unlike producing farmers, middlemen in meat bound to be a small part of the whole population.
Failure to keep them to their ration not nearly so serious a matter.
is,
therefore,
CHAPTER
PRIORITIES
i.
XIII
AND THE RATIONING OF FIRMS
discussion of the previous chapter does exhaust the distributional problem to which So far we have considered price control gives rise. this problem as being concerned exclusively with
THE
not
distribution
among people
all
the
supply at the
regulated
to
price
demands of
to satisfy the being some had consumers consumers,

insufficient
have their demands cut down. This line of thought proceeds as though each consumer's demand were a single homogeneous thing. For
some commodities, however, the aggregate demand of most consumers is made up of several demands
directed to different uses which the commodities
may be made to serve. For commodities of this sort it may be that the necessary restriction of
demand can be brought about most satisfactorily by regulating distribution among uses instead of, or as well as, distribution among people irrespective of uses. Naturally this form of regulation is more
readily applicable to simple materials that are capable of being devoted to a number of different ends than
to highly specialised finished goods. 150
CH. xiii
2.
RATIONING OF FIRMS
different uses
151
As between
open
to materials
the war-time regulations could, of course, only be based on some rough criterion of relative national
importance. criterion was,

altogether
clearly
its
The when
simplest way to work this a material was short, to forbid
employment in certain uses that were unimportant. Examples of this kind of
regulation in the Great

(1)
War were
The The
prohibition of the use of petrol for

:
pleasure-touring
(2)
prohibition of the use of paper for newscontents bills and, under certain conditions, paper traders' circulars, and the abolition of returns
' '
:
(3) prohibition by the Timber Supplies Department against packing various articles in
The
wooden
cases
and
crates
(4) prohibition of the use of electricity for lighting shop fronts, and the order restricting the hours during which hotel and restaurant dining-
The
rooms might use

remain open.
artificial light
or theatres might
These simple prohibitions accomplished somebut, when the volume of supply or the requirements of the government and different sorts of non-government uses were liable to vary, the mere prohibition of particular uses was not adequate. Resort was had to a system of priority among uses. A scale of Priority Certificates was instituted, which
thing
;
certificates of
ficates of
only permitted sales to would-be buyers with lower urgency after those with certi-
for
higher urgency had been satisfied. Work government had the first grade of certificate,
152
WAR
CH.
work of special national importance (e.g. export work, deemed valuable for protecting the foreign
exchanges) the next, and so on in successive stages. Iron and steel products were dealt with on this plan, and quarry stone and other road material on less
So elaborate, but substantially equivalent, lines. also were imported flax and leather and a number
of metals.
Whatever the precise plan followed,

it
the essence of
is
the construction of a scale
of urgency amongst uses, the less urgent being This system is sacrificed to the more urgent.
obviously preferable to chaos, but The intention serious objection.
such supplies as have to least urgent uses, leaving more urgent uses with access to them. But, in fact, there is no such thing as urgency of use in an abstract general way without
reference to the quantity of different people's holdThe first unit devoted by anybody to a comings.
paratively non-essential use will often serve a more urgent need than the last devoted to a comparatively
essential one.
is
open to a withdraw be withdrawn from the

it
is
is
to
Everybody would agree that water urgently wanted for drinking than for But to prohibit a man from using any washing. water at all for washing while allowing him an ample supply for drinking would probably have bad he would prefer to do some washing even results in consequence, he had rather less to drink. though,
much more
It follows that the

is
system of cutting
off certain uses
wasteful of satisfaction.
if
however, be obviated
of the waste may, departures from the general
Some
rule are permitted in special circumstances
under
xiii
RATIONING OF FIRMS
;
153
licence
may
and, in any event, the sum total of waste well be less than it would be if the system
of regulation imposed disregarded differences of urgency among uses altogether.

3. It should be added that there may be great administrative difficulty in preventing people from
using things nominally bought for one purpose

for another purpose. Thus, a housewife, who is so much for sugar granted jam-making and chooses
to use a part of
it
for ordinary
consumption,
is
not
easily detected or punished. When, however, as was usual in the war, regulations are operated through
producers instead of being applied directly to consumers, e.g. when bakers are forbidden to use wheat,
flour or sugar in making confectionery, or builders to use steel in building houses, they are more easily
enforcible.
4.
When
distribution
among
uses
has
been
regulated, there still remains, for materials that have to undergo a process of manufacture, the problem
of regulating distribution
to
among
the firms that wish
work them up.
were
restricted prices, if nothing done, this distribution also would be chaotic,
With
depending on accident, good fortune or favouritism. To this government regulation will often be preferable. Regulation implies, however, the choice of some criterion in accordance with which regulation The British Government during shall be worked. the war adopted the criterion of pre-war purchases.
The
use of this criterion
is
illustrated
by the rules
of the Cotton Control Board (1918) limiting the proportion of machinery that any firm might keep
154
at
WAR
CH.XIII
work on American cotton, and by the condition imposed on importers by the Paper Control, that they should supply their customers (i.e. manufacturers) in the same proportions as in 1916-17.
In highly organised trades like the cotton industry there was no technical difficulty in applying regulations
on these
lines,
but in
many
to
a special organisation
had
of the metal trades be created for the
purpose. It is clear that this basis of allocation could not be employed in connection with any
policy designed to last for
more than
a short period.
For an arrangement, which tended to maintain the various firms engaged in an industry always in the same relative position as they occupied in an arbitrarily chosen year, would constitute a quite intolerable obstacle to efficiency and progress. For to be howit was, regulation designed temporary,
ever, sufficiently satisfactory.
CHAPTER XIV
SUBSIDIES
i.
IT will be remembered that in the concluding
sentences of Chapter XI. a distinction was drawn between the cancelling bounties discussed in that
chapter and general bounties. Something will now be said of these general bounties. There are two
principal occasions for them. First, certain short commodities are largely imported from abroad.
'
'
The
price of these things, as
from the foreign
sellers,
cannot be controlled by legislation in the importing for attempts to control it would merely country lead those sellers to send their stuff to other markets. Hence, high prices of these things cannot be prevented by mere decree. Secondly, for certain things produced at home, conditions may become such
;
that very high prices are necessary even to yield
ordinary profit without any profiteering.' These high prices cannot be cut down by decree without
causing supply to
It may fall off very seriously. happen, however, that^ things in one or other of these two classes in the United Kingdom wheat is an example of the first class, potatoes of the second
155
156
WAR
CH.
are largely consumed by very poor people, and that high charges for them would lead to an amount of discontent that government in war time dare not
face.
In these circumstances
it is
open
to govern-
ment
to lower prices to consumers by itself paying It can do part of the price asked for by producers. this either by buying up the product from producers
and
a
reselling it at a loss to consumers or by offering bounty of so much per unit sold in the country. Whichever of these things it does, it is, in effect,
giving a present proportioned to purchases to the consumers of the bounty-fed article. Obviously, no
government will choose for this kind of treatment any commodities except such as are largely consumed by very poor persons. 2. Apart from the fact, to be referred to presently, that in war time the funds for these subsidies are likely to be obtained by the creation of bank credits, whereas in normal times they will come out of taxes, a policy of subsidies on poor men's goods is economically no different as a war-time measure from what it is as a peace-time measure. The advantages and disadvantages attaching to it may, therefore, be considered in a quite general way. The bounties may take either of two forms first, bounties on the whole consumption of particular commodities which are predominantly purchased by poor persons secondly, bounties confined to that part of the whole consumption which is actually enjoyed by defined categories of poor persons. The first of these methods is illustrated by the special subsidies which were paid on bread and potatoes during the Great War to
:
xiv
SUBSIDIES
' '
157
sidered a
enable prices to be kept down to what was conreasonable level ; the second by the
Irish Labourers Act, under which, not all housebuilding in the districts affected, but only housebuilding for labourers, is subsidised, and by the more
general arrangements which have been adopted to meet the post-war house shortage. I propose to compare these two methods, first, with one another,
and, secondly, with grants to poor persons made directly instead of on their purchases of particular commodities.
bounty limited to that part of the output 3. of anything that is actually bought by poor persons has the advantage over a general bounty that it saves transferring purchasing power in the first
instance from better-to-do people to the State and then back again to these better- to- do people on their
in
For this transfer and return must involve normal times additional taxation and consequent discouragement to production, and in war time additional credit creation with the evils attaching to that. This is the same advantage that a system of
purchases.
old age pensions confined to poor persons has over universal old age pensions. On the other hand,
limited bounties have the disadvantage that under
them the
and the charity element is more obvious further disadvantage that, unless the line between potential beneficiaries and others is skilfully drawn,
;
some people may be
inclined voluntarily to relax
their productive efforts in order to qualify for inclusion in the category of poor persons. Moreover,
when
it is
a question of giving a bounty in respect
158
WAR
CH.
of purchases of any ordinary article of merchandise, as distinguished from such personal goods as houses,
education and insurance, it is practically very difficonfine the bounty to one set of buyers if this were done, the privileged buyers for, only
cult to
;
would
4.
find a profit in setting
up
as
middlemen on
behalf of others.
ticular article,
have next to compare a bounty on a parwhether universal or confined to the purchases of the poor, with more direct forms of help to the poor. If the amount of the bounty-fed commodity which each recipient is to consume is fixed authoritatively, as under the British system of
free
We
and compulsory education, a gift of so much money's worth in payment for the bounty-fed commodity has the same effect as an equal gift made The same thing is true if the amount of directly. the commodity which anybody purchases is not fixed authoritatively, but is, for some other reason, not
change in consequence of the bounty. Thus poor people are accustomed to buy some things through a common purchase fund, so organised that the payment a member has to make does not vary with the amount of his individual purchases. Sick clubs are arranged on this plan. There will be no inducement to a member of a sick club to increase the amount of the doctor's services that he calls for in a year merely because the fixed amount that he has been accustomed to pay for membership of the club is taken over and paid by the State. These In general, conditions, however, are exceptional.
liable to
,
when
a bounty, or the equivalent of a bounty,
is
xiv
SUBSIDIES
159
given on any commodity, the beneficiaries of the bounty will buy more of it than they would have
done had they received an equal amount of money and were free to spend it as they chose. In this
resources are diverted out of the natural channels of production, and there is a presumption that this diversion will involve a waste of
way
economic resources and a loss of satisfaction on This presumption is not, however, whole. The bounty method may still sometimes absolute. be better, not only because there may be special economic or non-economic reasons for encouraging the consumption of the particular thing on which the bounty is given, but also because the " " element of charity is less obvious and, therefore,
the
less
damaging
it
to the morale of the beneficiaries,
when
5.
is
concealed in a bounty than
when
it is
displayed in a direct dole.
There remains the special point, referred to in war time subsidies are likely to be furnished out of credit creation. As has been explained in an earlier chapter, this method of raising
section 2, that in
funds
is
equivalent to raising
portioned to income.
them by taxation proSuch taxation hits poor per;
sons very hardly. The object of the subsidy is to but the reduce the cost of living to these persons for the funds it raises the cost of process obtaining
of everything that they
thing.
buy except the subsidised
it is designed to help poor people in a given measure by means of a subsidy, say, on bread, it will always be found that they are in fact helped less than was intended and either
Consequently,
when
i6o
WAR
CH. xiv
this fact will
have to be accepted or a further subsidy,
on bread or on something else, will have to be given to counteract the untoward indirect consequences of the original subsidy. This further subsidy will, in turn, set up other untoward indirect consequences, which will, in turn, need cancelling. Subsidies granted out of taxes, as in normal times they naturally will be, are free from this complieither
cation.
CHAPTER XV
THE AFTERMATH IN CURRENCY AND EXCHANGES
bank credits is an objectionable of financing a war, it is an intolerable method of financing the normal processes of peace. So long as it continues, it involves, as has been explained, the
i
.
IF the creation of
method
levy of concealed taxation proportioned to income, the shifting of wealth from receivers of fixed income
to others,
and perpetual difficulty in adjusting the wages of work-people to always rising prices. It involves, too, in consonance with the upward move-
ment of
prices, a
growing depreciation of the ex-
changes with gold standard countries, and, by engendering uncertainty both about future prices and about future rates of exchange, it seriously hampers
If the trade contracts and, through them, industry. far of is carried debasement enough, people process will come to distrust the government currency alto-
and it will become practically valueless, gether the whole industrial life of the country will be dis;
arranged.
Farmers, for example, not caring to
sell
wheat for worthless paper, and not being able easily to barter it directly for goods, will be tempted only
161
62
it
WAR
CH.
to
grow enough of
for their
own
requirements.
Other producers will be affected in the same way. There will be government bankruptcy and industrial collapse, and the whole laborious edifice of modern economic life will have to be built up again from the beginning. In the light of these considerations, nobody doubts that, at the earliest possible moment when a war is over, governments should cease financing themselves by further creations of bank credits. No doubt, the calls upon them may be so enormous, as, for example, in Germany and Austria under the Peace Treaty, that it is politically impossible for any government to maintain itself in power and at the same time to levy, in an unconcealed form, sufficient taxes, or to raise sufficient loans to enable it to meet its international obligations and also to pay its way. If this is so, continued finance by bank credits will be unavoidable, in spite of the abyss to which it is sure to lead. This consideration may well suggest
the propriety of international action designed to but it ease the burden of certain distressed nations
;
no argument against the view that, as soon as possible, every government should cease to resort
affords
to credit creations as a source of
2.
money income.
itself necessarily
The
cessation of credit creations to finance
government does not, however, by

suffice
continued credit expansion. The process of currency depreciation, which finance by bank credits has started, may, unless further remedial steps are taken, continue under its own momentum even after the initiating cause has been shut off The most prominent source of danger is floating
to stop
xv
THE AFTERMATH IN CURRENCY
163
debt in the form, in this country, of Treasury bills. The government may not only have stopped raising
new money by bank
credits, but may have ceased borrowing altogether and be paying its way out of Even then it may, on occasions, find taxation.
Bank of means of repaying short-time advances which the public and the banks decline to
itself
forced to use credit creation at the

as the only
England
Thus, if 100 millions of Treasury bills fall repayment at anytime, and, instead of renewing them, the public put the proceeds of the repaid bills to their deposit credits, or, so far as it is banks
renew.
due
for
who
held the
bills, if
the bankers lend 100 millions
more to the public instead of renewing them, the government will be forced to borrow 100 millions
on Ways and Means from the Bank of England. This means indirectly an increase by 100 millions of bankers' balances at the Bank of England against an unchanged amount of liabilities. The bankers (outside the Bank of England) are, therefore, able, if
they choose, without weakening their proportion, to increase their liabilities by no less than 400 millions
more, and the doors are open for new credit expanThe only way in which the government can sion.
prevent this
is by offering a rate of interest suffito ensure that Treasury bills falling due ciently high shall be renewed. Very likely, however, they may
hesitate before offering a very high rate for these bills, since this must naturally carry with it very
high rates for
Hence, for comgenerally. further credit expansion, it against plete protection is necessary that, besides stopping new creations to
money
64
WAR
CH.
finance new expenditure, the government should, as soon as practicable, fund, or pay off, floating debt in the form of Treasury bills and any other short-time obligations due from it otherwise than to the Bank
of England.
3
.
At first sight it might be thought that in England
the basis of the credit structure could also be enlarged in another way. The war broke down the rules
by which the issue of fiduciary currency was limited. It was open to bankers to exchange their balances at the Bank of England against new currency notes to an unlimited extent. During the war these balances, as explained in Chapter X., came back into the Bank
of England
when
that bankers' reserves were increased
the government spent them, so by the full
of the notes they held themselves and did not pass on to the public. After the war, however, things became different. When the government
amount
had ceased
to
finance
it
balances paid to
1
in
through banks, the exchange for notes would

itself
consists in
The funding of that portion of the floating debt which Ways and Means advances from the Bank of England
a different effect
would have
bills.
from the funding of Treasury
If 50 millions were raised from the public on a long loan and employed to extinguish these advances, the deposits of bankers and also their balances at the Bank of England
would be reduced by 50 millions. In order to maintain their proportion they would need to cut down their loans to the public by no less than 200 millions, unless the Bank of England was prepared to lend to their late customers. If it made new loans to these people equal to the 50 millions it had been lending to the government, these 50 millions would come into the balances of the banks, and the basis of the credit structure would be exactly the same as it was before.
xv
165
probably be used to wipe out Ways and Means debt to the Bank of England. These balances, therefore, would not reappear in the credit account of the bankers at the Bank of England, and,
consequently, the reserves of bankers, instead of being increased, would merely be converted from
the form of balances at the
form of currency
notes.
Bank of England into the Hence, the device of buy-
ing notes with balances would not, after the government had ceased to rely on bankers' loans to finance
its
purchases, enlarge the basis of the credit structure.

4.
We have then only one way in which this basis
is liable
to be enlarged, and this way itself may be eliminated by the funding of Treasury bills. Expansion of bank credit is, however, capable of being
brought about, not only when the basis of credit is enlarged and the proportion of bankers' reserves to liabilities retained, but also when the basis of
credit
is
unaltered and the proportion of

is
liabilities to
in Chapter enlarged. both methods of alike are held in X., expansion check in normal times by the fact that the rise of
reserves
As was explained
prices engendered by them sets up a drain on the gold reserve of the Bank of England, thus forcing up the Bank of England discount rate directly and
the market rate indirectly. The system of selling currency notes against bank balances removes this
check to credit expansion.
It
enables the bankers
to convert their balances into currency notes instead of into Bank of England notes. Consequently, the
reserve of the
Bank
of England
is
not depleted, and

rates
the forces making for a rise in
money
and a
66
WAR
CH.
consequent check to credits are not set in play. In is nothing to prevent the creation of continually growing credits through an increase in the proportion of bankers' liabilities to
these circumstances there
hand and at the Bank of England) on behalf of private borrowers. If this is to be stopped, a further step is required over and above the cessation of credit creations in favour of government and
their cash (in
the funding of Treasury bills. This step may be either the enforcement of a high bank rate or the
prohibition
notes.
of
further
manufacture of fiduciary
(high bank rate) leads
;
The former method
manufacture and method (stoppage of note manufacture) leads indirectly to a high bank rate. They are really two paths to the same end. If credit expansion is
indirectly to a stoppage of note
the latter
proceeding rapidly, it may be wise to begin operating through bank rate in a gradual manner, and then
to
crown the movement by a
legal limitation
on the
In December 1919 a limit through Minute not a formal legal limit was imTreasury in the United posed Kingdom on any further issue
note issue.
of fiduciary currency notes beyond a
maximum
of
320 millions.
5.
The danger
of continuing credit expansion
is
not, however, the only monetary aftermath of war. Let it be granted that a halt to further advance has
been successfully
all
is
called.
This does not mean that

of
right
again.
The system
war finance
adopted by practically all European countries involved the collapse of the gold standard. In the United Kingdom currency notes were kept nomin-
xv
167
ally convertible into sovereigns,
but the melting of
sovereigns was prohibited, and the export of gold was barred, during the war by fear of submarines,
and, after the Armistice, by governmental regulation. These things broke the tie that bound currency to A bullion. note was still necessarily worth a but both a note and a sovereign were sovereign, free to assume any value in terms of bullion between their face value and nothing at all. This implied that sterling (and the same thing is true of francs and lire) was liable to assume any value in terms of the currency of gold standard countries between its face value and nothing at all. In other words, the sterling exchange with dollars was liable to fluctuate to any extent between 4-86 dollars to a and an
The indefinitely small quantity of dollars to a wide range of fluctuation thus opened up involves
.
a serious injury to trade. An Englishman will hesitate to sell goods in America if he does not know how
much
it
comes to be paid and an American in the same way about sales in England.
;
sterling their dollar price will yield him when will hesitate
No
doubt,
it
is
possible for traders in various
ways
to insure
themselves against loss on exchange fluctuations, but the insurance costs money and so is itself a
handicap. Nor does the collapse of the gold standard in Europe merely mean obstacles to trade between Europe and gold standard countries. The
various
fluctuate
European currencies do not, of course, from gold parity on a common plan, but independently and diversely. Thus, exchanges are
rendered unstable, not merely with gold standard
i68
WAR
CH.
It is an urgent countries, but also with one another. need of industry to narrow the range of exchange fluctuation between the various countries of the
world.
6.
It
is
theoretically possible for
any country
on an inconvertible paper basis to maintain the exchange between its currency and the currency of
any other country in the neighbourhood of any parity it chooses by operating, through control of money rates or currency issues, on its own internal If every country in which the gold price level. standard has broken down were to select some parity with dollars and, by internal currency manipulation to maintain it, we should have again a system
this
of nearly stable foreign exchanges. Theoretically, kind of system could be established without a
restoration of the gold standard in any sense ; and is not even necessary that the currency of a
it
country which is used as a base for others should be a gold standard currency. A whole world of nations, each with separate inconvertible currencies, could,
their governments were sufficiently firm and able, maintain a system of approximately stable foreign exchanges. Practically, however, in the present state of the world, governments are not strong enough, nor yet sufficiently trusted, for a system
if
directly
is
of this kind to be likely to work. Something less dependent upon the conduct of politicians
needed.
to
The
best
way
to
lessen
is,
fluctuations in actual conditions
as
it
exchange seems to
countries
me,
as
aim
at the restoration in as
many
possible of an
effective
gold standard, under
xv

shall again
169
which gold
at a fixed parity
be freely obtainable for export with currency. This would give
the same sort of stability as existed before the war to the exchanges, among themselves and with
countries already on a gold standard, of all the countries that adopted it. There is, of course, no under this necessity system for gold to be made
available in the
circulation.
form of coin
for purposes of internal
The restoration in any country of an effective standard does not imply the restoration of the gold pre-war parity between its currency and gold. It is possible to de-valuate a currency, to make paper
7.
js or francs or
lire
or
marks convertible into
a smaller quantity of gold than they were convertible into before the war, and then, on this lower Here basis, to reopen the doors for gold export.
which,
a large issue is raised. Let us consider a country in as in the United Kingdom, new credit
creations have come to an end until this has happened it is obvious that no further step can be taken and the process of currency depreciation has thereby been stopped. Ought such a country to de-valuate its currency on the basis of the existing exchange, to try and get back to pre-war parity, or to aim at some parity intermediate between the present gold parity of its currency and the pre-war
'
'
parity
8.
is
The
first
to distinguish
step towards answering this question between different elements of which
up.
a given existing exchange depreciation may If English prices generally had been
be made doubled
iyo
WAR
CH.
owing to currency changes, while American prices were unaltered, and if nothing else had happened, the consequence would be a fall in sterling to half its old value in dollars, and no change at all in the real conditions of trade. This is the sort of adjustment
that
rates tend to
contemplated when it is said that exchange conform to purchasing power parities. If equilibrium is to be established, it must take place for, if it does not, Englishmen will be getting
is
;
different quantities of sterling per unit for the same commodities as sold in England and as sold, after
allowance has been

charges, in America.
made for transport and tariff With the adjustment made,

as before to
;
England would send the same things
these America, getting the same amount of dollars would be convertible into twice as much sterling as before
;
stuff as the old
and that would buy the same amount of English amount of sterling used to represent.
This element in exchange depreciation

a reflection of relative
in the
movements
two countries, made of the correctives to such
is primarily of general prices possible by the removal
movements
that operate
under an
effective gold standard.
It is not,
however,
necessarily the only element present in any actual
exchange depreciation. If at any time Englishmen, on account of purchases in America or for any other
reason,
owe
a large
number
of dollars in
New York,
and not many
bills for
dollars
drawn by English
exporters are available, English debtors will have If they difficulty in raising the dollars they need. cannot get hold of dollar bills, they will have to
borrow
dollars
in
New
York,
perhaps
at
high
xv

As expressed
if
171
interest.
in
the
currency of
likely
the
borrowers' country, this

especially high
interest is
to
be
Americans
fear that the currency
of that country will by a continuance of
become
*
still
further depreciated
'
inflationist
it
to avoid the high interest,
will
In order finance. be worth while for
Englishmen, Frenchmen, or Italians to pay a higher price for dollar bills than corresponds to purchasing power parity. Hence, when price levels are such that the exchange ought or tends to be at, dollars to the say, 4 ,, it may actually be forced to, dollars. Of course, a fall below purchasing say, 3-50
'
'
'
'
power parity by Americans
greatly lessens the profit obtainable in sending goods to England, and
greatly increases that obtainable by Englishmen in sending goods to America. Consequently, the
lapse below purchasing power parity will start forces making for its own correction. But, particularly
in a period
when
export industries are disorganised

for imports
is
and when the need
urgent, this force
Clearly, the operate in a very halting way. accidental and temporary element in exchange depreciation that is thus left over ought to be eliminated
may
from our calculations when the problem of selecting a permanent gold parity is under discussion. Nobody would propose to adopt a gold parity lower than is required to conform with the existing purchasing
power
parity.
Thus,
if
,
the dollar exchange actually
but there is reason to believe stands at 3-50 to the that 40 per cent of the fall from pre-war parity is
accidental
that
and temporary, the lowest new parity anybody would advocate would be, not 3-50,
72
dollars.
WAR
CH.
but 4
to
form estimates, except very
Existing statistics do not enable us tentatively, as to the

is is
part of the existing exchange depreciation that accidental in the above sense, and the part that
and in congruity with purchasing power parity. Prima facie it might be thought that the fundamental part can be isolated by a comfundamental
parison of the changes in general prices, as shown in index numbers, that have taken place in, say,
England and America.
Ordinary index numbers,
however, refer to the prices of things in general, and not specifically to the smaller group of things
that enter into international trade.
To know
that
things in general had quadrupled in price in France and doubled in price in America would not, therefore, enable us to infer that a 50 per cent fall in the
dollar value of the franc
equilibrium. ranted on the assumption that the prices of things in general, as recorded in the index numbers of the
was required to restore This inference would only be war-
two countries, had moved exactly
parallel
with the
prices of the goods actually entering into the international trade ; and that assumption cannot properly
be made. This difficulty would remain even if the index numbers at present in existence gave
perfectly true pictures of movements of the_ prices of things in general in the countries to which they
Actually they do not do this, as is apparent from the fact that different index numbers the Bureau of Labour and the Bradstreet numbers for the United States, and the Board of Trade, Statist and Economist numbers for the United Kingdom
refer.
xv
173
give widely divergent accounts of the prices of things in general. There is, thus, no certain means of
distinguishing the fundamental from the accidental elements in the present large depreciations of the If action has to be taken European exchanges.
before the
we can do
is
commotion due to war has subsided, all to make a more or less arbitrary allow-
ance for the accidental element in actual exchange rates, and to use the resulting figures as the best
representation to be got of the
*
'
proper exchange rates conformable to purchasing power parity. For the United Kingdom a small allowance perhaps 10 per cent would be sufficient. There is reason to suppose, however, that the Austrian, German, Italian and French exchanges are substantially below purchasing power parity, in con-
sequence partly of temporary trade conditions and partly of foreign uncertainty as to the future currency policy of the governments of some of these countries. For them, therefore, a much larger allowance should be made before the proper exchange rate is
' '
estimated from the actual rate.

9.
Let us
*
start
'
of the
relative
proper purchasing powers of the currency of this
then with some estimated level exchange rate conformable to the
the
country and of the United States, say 4-20 dollars to The question is whether we should de-valuate
.
our currency to that level, or aim at restoring pre-war parity with gold, or aim at something intermediate between the two. The principal relevant considerations are as follows. In favour of a return to pre-
war parity
it
may be urged
that the adoption of any
174
WAR
CH.
lower parity would mean deliberate governmental depreciation of the currency, and so would reduce general confidence in the financial probity of the de-
and also that valuating country to all lenders at fixed interest

;
it would be unfair whose loans were
made
before the war or during
its
earlier stages
before the currency had greatly depreciated. On the other side are the troubles and inconveniences of
the backward passage. A higher norm of exchange can only be brought about in correspondence with a fall in internal, as compared with external, (gold) Such a relative fall may be induced by (i) prices. a growth in production here at a greater rate than in
America, or
(2) a contraction of credits and currency here relatively to America. In view of the fact that British industry has been more seriously dislocated
by the war than American industry, something may be hoped for under the former of these two heads.
Plainly, however, not very
from
this
side,
much can be expected and adjustment must be sought
mainly on the side of purchasing power. If America were to adopt the policy of expanding her bank credits and increasing her issues of fiduciary notes, pre-war parity might be restored without any action on the part of this country. American creations of gold substitutes would cause gold to fall
in terms of things as much as sterling has already fallen, with the result that gold and sterling would
return to their old parity. If, however, as has in fact happened, America does not in this inflate
* '
sense,
still
more
if
Kingdom,
in order to get
America deflates,' the United back to pre-war parity,
'
xv

' '
175
must
deflate
so
far
that
the
ratio
of current
is
British prices to pre-war British prices
greater than the ratio of current
no longer American prices to
pre-war American prices. This implies a reduction in the credit structure and a withdrawal of notes
from
circulation.
It
can be brought about either
by forcing currency notes into the Bank of England by high money rates and then transmuting them into government securities, or by buying them for destruction from the public or the banks with balances obtained by taxation a proceeding which would compel the banks to draw on the reserve of the Bank of England and so would force up money
The former of these plans has the advantage under it we know, whereas under the latter plan we do not know, how large the rise in Bank rate is going to be, and so are secure against inadvertently administering a severer shock to business than was intended. But, apart from this, the two
rates.
that
both, of course, supplementary provision, that, after the volume of the fiduciary note issue has been reduced,
plans are essentially one.
They
require, as a
the reduction shall not be neutralised by a corresponding issue of new notes. To this end it would
be possible to enact that, whenever fiduciary notes fell to any amount, that amount should immediately
become the
legal
maximum
so that a reduction by,
say, 5 millions
occurring in any week would mean This plan a permanent reduction by 5 millions. would be somewhat stringent. The Cunliffe Committee recommended that the maximum actually
attained
in
any year should be made the
legal
176
WAR
CH.
maximum
of the next year. This plan could only A plan interabout a slow reduction. bring very mediate between the two would be to provide that, until the pre-war parity is restored, as and when the actual volume of the fiduciary currency falls, under the influence of a high bank rate or otherwise, the legal maximum should chase it downwards, keeping it always closely in sight. For example, any 10 million fall below the existing legal maximum might automatically bring about a 5 million fall in the legal
maximum. 1
All of these
methods
are devices,
from
the currency side, for bringing about a reduction in prices. As such, they must, in some degree, and the discouragement will discourage industry
;
be increased by friction and disputes when attempts are made to lower wages in correspondence with the The process to be gone through on the price fall. return journey to pre-war parity is not a smooth one
either for employers,
whose dividends
will fall, or for
wage-earners, whose employment will be threatened. Moreover, the successful accomplishment of it

involves afterwards the
1
payment of
interest
on war
It may, perhaps, be thought at first sight that this plan would create difficulties, at periods of normal seasonal drain, by making the currency rigid. But this is not really so. Fivepound notes would still be available in the banking reserve of and if, as the Bank of England for direct use by the public would no doubt happen, extra i notes were also required,
;
these could always be provided without breach of the law for the maximum applies only to the fiduciary issue by a transference to the Currency Note Reserve of 5 notes equal to the
1 notes that it was desired to issue. aggregate value of new position as regards seasonal demands for extra currency would thus, in substance, be the same as it was before the war.
The
xv
177
in
loans in a currency much more valuable than that which a large part of them was subscribed.
is,
This
side,
prima
facie, unfair.
It is also,
on the
fiscal
exceedingly inconvenient.
in
For,
money
in-
comes being reduced

is
proportion as currency
much
and
appreciated, appreciation will make necessary higher rates of tax for the service of the debt,
this will
make more
difficult
the problem of
it is
balancing the budget. In the light of these considerations
clear that
the case for a return to the pre-war parity is stronger that is to say, the arguments in favour of it have
more, and those against

'
it
have
'
less,
force
the
nearer to this parity the proper exchange rate of any country with gold standard countries is, or is ex-
pected to be
the United
is
in finally stayed. For where the American exchange Kingdom,

inflation
when
'
only depreciated some 20 per cent, the balance of argument is, I think, in favour of an ultimate and not too long delayed return to pre-war parity for
;
Austria and probably
points to a sublower for stantially parity Italy and France the issue is less clear, but there can be no doubt that,
Germany
;
it
if
a return to pre-war parity
is
aimed
at,
the strain
will
be exceedingly severe, and the process of return must be slow.

10. If any country decides to aim at a new parity lower than the pre-war parity, it will be a matter for consideration whether an attempt should be made to alleviate the hardships of those creditors
whose loans date back from before the war by legislation directed to scale up certain classes of
178
them
WAR
CH.
debts, thus converting
into debts of higher
nominal amount in terms of the new national money. In view of the frequent changes that take place in the ownership of securities, it would be very difficult The to work a plan of this kind satisfactorily. matter might, perhaps, usefully be studied by an
expert commission, but, on the face of things, it seems probable that it would open too wide a door
to attempts to
ii.
unbury the
past.
the parity determined upon has been nearly achieved, whether the parity chosen be the pre-war parity or another, it will become possible once more to give gold freely for export in return
When
been fixed upon. This means whether or not gold is also given in coined form for internal circulation the restoration of an effective gold standard. There will then be no tendency for gold to be continuously drained abroad, any more than there was before the war. Clearly, however, if discount rates are to be guarded against violent fluctuations on account of temporary drains, the gold held in reserve will need to be of subfor currency at the parity that has
stantial
amount
relatively to
any probable drain
for, otherwise, the presentation of a
small absolute
quantity of notes to be encashed into gold for export will involve a large proportionate fall in the
country's gold reserves. The Committee on Currency and the Foreign Exchanges pointed out that, on certain assumptions, the size of the gold reserve
and the
stand
in
size of the fiduciary part of the note issue a definite quantitative relation to one
another, and that any given settlement of the one
xv
179
implies a corresponding settlement of the other. " Assuming the restoration of an effective gold
standard, and given the conventional standard of banking practice and the customs of the public as
regards the use of currency, the amount of legal tender currency (other than subsidiary coin) which can be kept in circulation, including the currency
holdings of the banks and the banking department of the Bank of England, will determine itself automatically, since,
if
the currency becomes redundant,

fall
the rate of discount will
and prices
will rise
notes will be presented in exchange for gold for export and the volume of the currency will be
reduced pro tanto.
If,
on the other hand, the supply
of currency falls below current requirements, the rate of discount will rise, prices will fall, gold will be imported and new notes taken out in exchange for
it."
was contemplated by the Committee that virtually the whole amount of the currency gold in the country would be held in the central reserve at
It
the
" the of England. In these circumstances, total circulation (in the above sense) being auto-
Bank
matically determined, it will follow that, the higher the amount fixed for the fiduciary issue (including, of course, the fiduciary part of the Bank of England's notes), the lower will be the amount of the covered issue and, consequently, of the central gold
reserve, and vice versa, while, if the fiduciary issue was fixed at a figure which proved to be higher than the total requirements of the country for legal tender
currency, the covered issue, and, with it, the central gold reserve would disappear altogether. It is clear,
i8o
WAR
CH.
therefore, that the amount of the fiduciary issue must be fixed at a figure low enough to make sure,
not merely that there will always be some covered issue, but that there will always be a covered issue of sufficiently substantial amount to secure that the
covering gold, which constitutes the central reserve, never falls so low as to give rise to apprehension as The Comto the stability of the gold standard." mittee suggest that a normal gold reserve of 150
they
would be a reasonable one to aim at and " until this accordingly recommend that, amount has been reached and maintained concurmillions
;
rently with a satisfactory foreign exchange position for a period of at least a year, the policy of reducing the uncovered note issue as and when opportunity
When should be consistently followed. of basis on the are the exchanges working normally the reserve of a minimum position 150 millions, should again be reviewed in the light of the dimensions of the fiduciary issue as it then exists." l Presumably, if the position was considered satisfactory,
offers
. .
.
the volume of the fiduciary issue would, thereupon, be fixed permanently at the amount then outstanding. 12.
One word
of caution must be added
The
restoration of an effective gold standard, coupled with the establishment of a normal gold reserve
adequate to prevent ordinary drains from causing

violent fluctuations in discount, would clear away the technical monetary difficulties left over by the
war.
There
is
no reason to suppose, however, that

1
Loc.
cit.
pp.
9, 10.
xv
it
181
would involve a return to anything like the prewar level of prices. The war, by causing many countries to use paper for purposes for which they
used to use gold, has greatly lowered the demand for gold in terms of things. The new American Banking System, introduced immediately before the
war,
which substitutes centralised for scattered reserves, has also made large economies of gold
possible.
The
gold
result
is
a general fall in the real
value
of
throughout the world.
By slow
degrees this fall is likely to be mitigated through the diminution that it will cause in the profitableness
and, therefore,
it
in
the
volume,
of
gold-mining.
Moreover, may happen that certain countries, which have now little use for gold, may, in reaction
against the evils of unregulated paper, again bid for large quantities of gold to renew their currencies.
it is impossible to offer any confident the whole we may reasonably expect that ultimately the real value of gold throughout the
On
this
matter
forecast.
On
world will rise substantially above the low level round which, taking good and bad times together, it tends to move now. In the near future, however, whatever action the United Kingdom takes, gold is not likely to attain, or even closely to approach, the purchasing power in terms of things that it possessed in 1914. This implies that, when all the restorative processes contemplated in the preceding pages have been accomplished and our currency is again on a sound basis, prices will still stand completely substantially above the pre-war level.
* '
CHAPTER XVI
THE CONTROL OF IMPORTS AND FOREIGN INVESTMENTS
IN connection with the discussion of foreign exchanges carried through in the preceding chapter something should be said of the controls over imports and foreign investments that were widely introduced during the war and still survive in several These controls are usually conceived as countries.
i
.
rates,
remedies or palliatives of adverse foreign exchange and their purpose is supposed to be to make
these rates
more
favourable.
a
This
is
an inadequate
usually,
view.
It
confuses
symptom, which
though not necessarily, accompanies a particular malady, with the malady itself. This malady is
purchase of, and so to obtain, It is certain vitally necessary things from abroad. easily illustrated from the war experience of this
inability to finance the
Prior to 1914 the United Kingdom was accustomed to import large quantities of food and raw material and to pay for them out of her claims
country.
for
interest
upon
loans
formerly
made by her
citizens to foreigners, and out of the proceeds of the sale of current exports of coal, manufactured articles 182
CH.XVI
THE CONTROL OF IMPORTS
183
and shipping and banking services. As a result ex the war our need for imports, particularly of munitions and food, both for our own use and for the
use of our Allies, enormously increased while the amount of labour and capital available for making It is exports to pay for these things diminished.
;
made between our requirements and our means of payment was partly filled by the utilisation of that portion of our claims to interest which we were formerly accustomed to devote to capital investments abroad. But, even so, it was extremely difficult for us to find means of paying for the enormous extra purchases which we This was our position during a desired to make. great part of the war period, as it is the position of more than one country suffering from grave dearth of food and raw materials even at the present time. The fundamental problem is to find some way of
true that the gap thus
financing the importation of vitally necessary foreign This problem can be solved either by supplies.
obtaining command over sufficient foreign purchasing power to satisfy all our needs or by conserving such foreign purchasing power as we do obtain
command over to finance these things. 2. The means available for obtaining command
over foreign purchasing power are (i) the export of (2) the sale of securities, gold goods and securities or other marketable property abroad (3) borrowabroad loans and through ordinary ing (4) the
;
; ;
sale abroad,
national paper
presumably to foreign speculators, of money. In the urgency of war and of post-war disorganisation it may well be impracticable
84
like
WAR
CH.
send abroad export goods in adequate quantities, and the supply of securities or other property saleable to foreigners may not be large enough to fill the gap. Moreover, individual foreigners will not make loans, and foreign speculators will not buy the paper money of countries
anything
in need,
for manufacturers to
beyond a
strictly limited
amount.
The
resulting difficulty may, however, be got over with the help of foreign government loans. In the period
following the entry of the United States into the war down to the Armistice, it was, in fact, got over
The United States Government provided sufficient credits to enable the Allied nations
in this way.
to finance their essential foreign purchases. The immense help that it in this way gave to the Allied
cause
is,
perhaps, inadequately appreciated by general

incidental
'
European opinion.
3
.
As an
and secondary consequence of

'
symptom of adverse foreign was covered Under arrangement exchange up. with the United States the British Government
action, the
American
was
free to
'
borrow
dollars
to
limited extent.
'
On
the strength of this
practically unit deliber-
ately pegged the American exchange by offering dollars to any British traders who had need of them
at the rate of 4.76 dollars to the Clearly, with an indefinite supply of dollars available at this rate,
.
nobody would buy
at
any worse
rate.
The pegging
of sterling in the close neighbourhood of pre-war and a similar, parity was, thus, rigid and complete
;
though less fully effective, policy was adopted on behalf of the franc and lira exchanges. The
xvi
185
position thus brought about was peculiar, because, in view of the large rise in European prices relatively to American prices, there is reason to believe that
the purchasing power parity between British (and

still
more French and Italian) currency and American currency would have been represented by a figure
below that
at
substantially
c
which the exchanges were

pegging,
therefore,
in-
economic equilibrium. It discouraged European exports to America and offered an opportunity for abnormal profit to American traders who were able to sell goods in England, France or Italy. The reason, of course, was that the relative price levels and the exchange rates taken in combination made the number of dollars realisable by such traders from a sale in Europe greater than the number realisable from the same sale in the United States. The lapse from economic equilibrium was able to continue, because the restrictions on
importation imposed by European governments in consequence of the shortage of transport rendered it
impossible for private traders to take advantage, to more than a very small extent, of the opportunities
actually pegged.' volved a lapse from
The
open to them by selling American goods on private account in Europe. The external prices, that is, the prices in foreign markets, of goods sold to Frenchmen, when translated into francs, were abnormally low relatively to French internal
for profit
but Frenchmen could not in practice buy things at these external prices, and so the influences,
prices
;
which ordinarily would have prevented them from remaining abnormally low, were unable to operate.
86
WAR
CH.
Consequently, the peculiar relations, which existed
between
rates of
relative price levels, trade conditions
and
exchange till early in 1919, were able to maintain themselves in spite of their paradoxical
character.
4.
dollars
So long as America was prepared to provide on loan to an indefinite extent, the Allies
were safeguarded against a failure to obtain essential foreign goods on account of inability to pay for them. In these circumstances it might be thought at first sight that everything was satisfactory and that there could be no need for any government interference with normal trading conditions. This, however, is a false inference. Though, with freedom to borrow
indefinitely,
wasteful use of foreign purchasing could not have prevented us from getting power essential imports, wasteful use was still very undesirable. For the funds, with which any use that could have been cut off was financed, were, in effect,
borrowed on behalf of its citizens by the British Government, and thus were obtained at the cost of piling up a burden of foreign national debt against the future. This source of embarrassment it was clearly undesirable to submit to without compelling
reason.
Consequently, even
when
foreign governit
ment
credits
were freely obtainable,
might
still
be
in the national interest to prevent private people
from employing any foreign purchasing power, of which they might obtain control, for other than
really important ends. foreign government credits are not freely obtainable, as in many parts of
When
Europe to-day, the case
for doing this
is
evidently
xvi
187
For then the penalty for wasting stronger. such foreign purchasing power as a country has is no longer merely that its government will have to contract a bigger foreign debt, but that it may be unable to finance, and so to obtain, goods that are
required to satisfy absolutely vital needs. 5. The period of the- war and the immediately
much
succeeding years have afforded
many
illustrations of
attempts on the part of governments to conserve such foreign purchasing power as they and their citizens have succeeded in acquiring for the purchase of essential foreign goods. These attempts have pro-
ceeded by way of prohibition or restriction of (i) the importation of relatively unessential goods and (2) the investment of capital abroad. The first branch
of this policy, which, during the war period itself, the grave shortage of shipping space must have forced us
to adopt apart altogether
from
financial considera-
There is, indeed, tions, is comparatively simple. the difficulty already referred to in another connecworth tion in Chapter XI II., that the first 1000 of one thing normally classed as a luxury may really
be more urgently needed than the iboth 1000 worth of another thing normally classed as a necesThis sort of consideration precludes us from sary. drawing a sharp line between some things which may, and other things which may not, be imported. But the difficulty can be got over well enough by a system of restriction and licences, under which the
importation of different things is limited in different The second branch of the policy, i.e. the degrees.
prohibition of investment abroad, presents a
more
i88
WAR
CH. xvi
complex administrative problem.
If the
men
of
are prepared loyally to support their government, it may be sufficient simply to prohibit the taking up of new foreign issues and the purchase
money
of securities, whether domestic or foreign, from nonresident foreigners. This was all that was done in
the United
Kingdom during
the war.
But recent
experience in certain European countries has shown For it that this arrangement is not water-tight. does not prevent an exporter of goods or of securities
from leaving the proceeds of
his sale
on deposit
in
foreign banks or diverting them to the purchase of foreign capital in foreign markets over which no It has, therefore, been control can be exercised. found necessary in some countries to make per-
mission
to
exporter foreign exchange, to which the exports give him a title, in purchasing goods for importation, or upon
his selling the foreign
official
either
export goods conditional upon himself undertaking to use
the
the
exchange
institution,
sells it to
people who
exchange to some form of which, in its turn, only wish to pay for imported goods.
CHAPTER XVII
THE AFTERMATH OF INTERNAL DEBT
left over after a war were the real costs of conducting the war and the smaller was the part of these costs provided through taxation. It is also likely to be larger, the real costs of the war being given, the more free-handed the government was during the course of the war in paying good prices for the things it bought. In whatever way debt has been incurred, a heavy weight of it causes difficulties and raises the formidable problem of how best it may be dealt with. To give concreteness to
i
.
THE volume
to
of internal debt
is likely
be
larger, the larger
the discussion of this question to the actual debt of the United

part of this debt that
set off against
is
shall
relate
it
Kingdom.
The
The
larger
external
may
reasonably be
money owed to us from abroad. of our external claims is volume aggregate
than that of our external debt, but many of these claims are unlikely to be met. As a convenient round figure, we may put the effective debt of the United Kingdom at some 6000 million all owed internally. With a debt of this magnitude at 5 per cent, so long
189
9o
WAR
CH.
will none of the principal is repaid, 300 million have to be raised every year to provide the interest. Nobody proposes, however, that the principal shall be left outstanding as a debt for ever. A large national debt weakens the financial position of a
as
State and makes it difficult for it to raise money to meet any emergency with which it may be confronted. Consequently, it has always been the
policy of prudent governments in time of peace When the British debt, steadily to reduce debt. in the years before the war, stood at the compara-
there was no low figure of 700 million about more revenue was this. Every year dispute raised than was needed for current expenditure and the payment of debt interest, and the balance was
tively
,
devoted, through the agency of a sinking fund,' to reducing the principal of the debt. policy at
'
least as strict as this
must be followed now.
In
addition to revenue for interest payment, further revenue must be raised for the repayment of
principal.
This means that
at
first
we should
require, say, 350 millions annually, and then, as the debt is gradually paid off, a smaller annual amount.
That
with
'
is
it
orthodox
'
financial policy.
In contrast
stands the rival policy of a large immediate That policy agrees special levy to redeem debt. with orthodox policy in refusing to allow the
principal of the debt to remain outstanding per-
manently. It differs from it only as regards the period over which repayment should be spread. Whereas orthodox policy would repay a small
fraction of the principal debt every year
and would
xvii
THE AFTERMATH OF DEBT
191
complete repayment in a period of, say, fifty years, the policy of a special levy would repay a very large fraction of the principal if it were practicable, it
by a single tremendous This is the chief financial issue of the present time, to which all questions of the form and method
effort.
would repay the whole
of a special levy, Is subordinate.
if it is
it,
on the whole, more
decided to make one, are to the
national advantage to discharge a great slice of the debt by a single levy now, and so to do away with
the obligation to pay interest on it in the future, or to repay the debt gra'dually and face large interest
charges for a long term of years ? This issue it is the business of the present chapter to examine.
But, before that task
to clear out of the
rests
2.
is
entered upon,
a popular
it
it is
desirable
way
argument which
is
on misunderstanding. The problem to be faced,
said, has
an
exact analogy in individual life. man in debt to the extent of 6000 borrowed at 5 per cent has to choose between paying interest and reducing the
and paying
orthodox finance principal of his debt slowly off the whole debt at once the policy of the special levy. It is impossible to decide which
of these two courses
would be more advantageous
in any general or absolute sense.
The
right choice
If,
depends on the circumstances of the debtor.
however, he has contracted the debt in resisting an attack by a powerful neighbour, and if, in the course of the contest, his resources have been strained to He breaking point, the issue is not doubtful. must repay gradually, for the simple reason that he
92
WAR
CH.
cannot repay at once. The United Kingdom at the present time, the argument runs, is in exactly this The war has so impoverished us that the position.
enormous payments, which a
special levy would involve, are wholly out of the question. Staggering under the losses of the war, we have welcomed the
offer of the
United States
to allow us to
postpone
for three years the payment of the interest on our American debt ; to talk in these circumstances of
wiping out great slices of principal is visionary nonsense. This reasoning sounds plausible. But
it
misses a vital distinction.
Whereas the individual

the whole of his debt
we have been imagining owes
to other people, the British nation owes practically the whole of its (net) debt to itself. So far as it is
indebted to foreigners, its position is analogous to that of an individual debtor. But, so far as it is
indebted to British citizens, its position is quite To repay debt of this kind involves no different.
drain on the resources of the
community
as a whole,
because, though one part of the community transfers resources to another part, the community as a whole pays nothing. It follows that, whereas the impoverishment of an individual may make it impossible for him to pay off the principal of a debt due from him, and the impoverishment of a community may have the same effect on it so far as its debt is held by foreigners, this impoverishment cannot make impossible the repayment by the
community of a debt held by its own members. This becomes obvious when we reflect that the community
can,
if it
chooses, impose on each of
its
xvn
193
a levy exactly equivalent to that member's of State debt. Thus, the analogy between holding debt and debt due from national held internally
members
individuals
3
.
is
not a valid one.
direct effect of the imposition of a special levy to wipe out debt is to lessen the amount of revenue that is required, and, therefore, the rates of
The
taxation
which have
glance
it
to
be imposed, in future years.
might, perhaps, be thought that the percentage reduction in rates of taxation would necessarily be equal to the percentage reduction in revenue raised. This, however, is not so. Under the British Income-tax the interest received by the holders of the national debt is itself counted
At
first
as
income assessable
to tax in the
same way
as all
If, therefore, national debt involving of interest (we need not for millions annually 300 the moment trouble about sinking fund) were paid
other income.
the assessable income of the country in future years would be 300 millions less than it would
off,
have been otherwise.

statistical
If,
as is
sometimes believed
data adequate to a satisfactory though estimate are not available, our assessable income
now
is between 4 and 5 thousand millions, 300 millions will represent about one-fifteenth of the whole. Therefore, after the debt had been wiped
rates of taxation fifteenit would require fourteenths as high as before to yield any given revenue ; and a reduction in the aggregate amount
out,
of revenue needed by, say, one- third would involve a reduction in tax rates, not of one- third, but of
two-sevenths.
Of
course,
this
is
very rough
94
WAR
CH.
approximation. In the absence of data concerning the distribution of war loan among different income
classes subject to
statistical
different rates of tax
no exact
statement can be made.
The general tend-
ency is, however, plain. Other things being equal, the reduction in the rates of taxation, which the repayment of the national debt through a special levy
would make
possible,
be thought to be
consideration on
is slightly smaller than it might But there is also a at first sight. It will be argued the other side.
immediately that high rates of taxation tend to check production. If this is so, any given lowering of the rates must benefit production. This means
that,
in
consequence of
it,
the
amount
of the
country's real income will be increased, and, other things being equal, this increase is likely, as will be
shown later, to be associated with an increase in money income also. It follows, therefore, that,
is
amount of revenue to be raised by taxation reduced by, say, one-third, the rates of taxation may be reduced by something more than one-third, and yet suffice to yield the reduced revenue now required. This consideration pulls the opposite way
if
the
to that set out above.

it
Which
to
of
them
is
the
more
It
is, impossible important however, very unlikely that they will exactly balance, and, therefore, very unlikely that the percentage reduction in tax rates made possible by a cancellation of debt will be exactly equal to the percentage reduction in revenue required. But this is a
is
determine.
secondary matter.
For the present purpose

that a substantial
it
is
enough
to
know
reduction in
xvii
195
revenue required will make possible also a substantial lowering of tax rates. 4. We have now to argue, as was forecast in Chapter VIII. 9, that, even though the income raised by taxation were all simply transferred within the country, being neither handed over to foreigners nor
yet spent
by government in the production of goods and services, nevertheless high rates of taxation would discourage work and saving, and so check national productivity. When a man knows that, i that he succeeds in out of every extra making, the government will take 55. 5d., he will tend to stop working a little sooner than he would do otherwise. When he knows that, out of the yield of every i that he extra puts by, the government will take
The 6s., he will tend to stop saving a little sooner. check to work means that production at the moment is carried less far than it might have been, and the check to saving hinders the expansion of capital
equipment, upon which production in the future depends. Moreover, if the rates of taxation in this country are high, not only absolutely, but also
and relatively to those ruling in other countries they are bound to be higher than in countries that
were neutral during the war, and may be higher than in former belligerent countries, should these
themselves decide to wipe out debt by a special levy the damage to production will be intensified by a tendency on the part of some rich people to
take themselves and their capital abroad. When to income-tax are added various sorts of indirect
taxation, there will follow, besides a reduction in
196
WAR
CH.
the quantity of production, a disturbance in its direction a diversion of resources from the sorts
of production that people would favour if left to themselves and, therewith, a further element of
These considerations lead to two very real loss. important propositions. The first is that, whatever the amount of the annual budget, to relieve that
budget to the extent of 300 millions (or of any other sum) will have a good effect on national productivity. The second is that, the greater the annual budget,
and, therefore, the higher the rates of taxation
which it involves, the greater the benefit resulting from a diminution of 300 millions in revenue requirements is likely to be. The reason, of course, is that, while a certain amount of money can be raised, by taxation of a kind and a degree that is not specially obstructive, as more and more money is required, resort must be had to worse and worse kinds of taxation and to more and more oppressive rates.
From these propositions it appears to follow that the imposition of a special levy now to wipe out our immense war debt, since it would enable taxation to
be substantially reduced from a
level that is
dangerously high, would promote work and saving and, through them, national productivity in a very
important degree.
5.
The amount
of force in this
argument
for a
special levy clearly depends on how high tax rates generally will have to be in order to finance the debt
charges, together with other government expendi-
Some evidence as ture, if a levy is not imposed. from the existing derived to this cafi, of course, be
xvii
facts.
197
But, since we are concerned with tax rates, not merely at the moment, but over a long period of years, account must also be taken of future If there is reason to believe that, before prospects.
very long, the high rates of taxation that rule now will no longer be necessary, the case for a levy is so far weakened on the other hand, if there is reason
;
to believe that even higher rates will be required, It is, therefore, importthe case is made stronger.
ant to inquire what, in fact, future prospects are. First, it is often urged that, as the world in
general, and this country in particular, recover from the effects of the war, the rate of interest at which it is that, therepossible to borrow money will fall
:
fore, the
government may hope
to effect a conversion
of
long-time debt, replacing, perhaps, its 5 per cent obligations by obligations of 4! per cent or even 4 per cent. If it succeeds in doing this, the amount
its
of revenue, which will be needed to provide interest on any given amount of war debt, will be pro-
portionately reduced, and, consequently, less high There is, of course, rates of taxation will suffice.
some
force in this consideration.
But
it
is
less
important than it appears to be at first sight. To begin with, while the greater part of our national debt bears interest at 5 per cent, war loan at this rate now stands in the market at under 90. This means that money on government security cannot now be borrowed at much less than 6 per cent. The rate of
interest will, therefore,
have to
it
fall
very decidedly
below
its
present level before
will
be possible for
the State to reborrow on terms
more favourable
198
WAR
CH.
than 5 per cent. The prospect of reborrowing on terms substantially more favourable than this is,
therefore, somewhat remote. Moreover, even if the rate on which new borrowing could be effected
were substantially below
5 per cent at the present time, a large part of our war loan cannot, under the terms of issue, be repaid at par until a number of
years have elapsed.

it
possible
some years hence
Finally, even if conversion made to reduce the interest
payable on the national debt by as much as onetenth on the average, this could hardly lead, in view
of the continuing need of other government expenditure, to a reduction in the aggregate revenue The required of more than one twenty fifth.
possible reduction in rates of taxation
would make
which this do would something, possible, though could not possibly do much, to make the need for a
it
special levy less urgent.
Secondly, there is good reason to believe that the productive power of this country will continue to increase in the future as it has done in the past.
Possibly, as a result of the stimulus of war, it may even increase at an accelerated pace. This increased
it is
productivity will involve increased incomes, and so, argued, will make it possible to raise the same
revenue as
taxation.
now by means
There
is
of
much
lower rates of
in this contention an important
element of truth
sary.
but some qualification is neces; Plainly, if our national debt were contracted in terms of commodities, an increase in the produc-
tivity of the United Kingdom must make it easier to budget for the annual debt charges. Whereas,
xvii
199
before the improvement, these charges absorbed, say, one-twelfth part of the real income of the people,
they might absorb, say, one twenty-fourth and the rates of taxation associated with them part be might roughly halved. But the national debt is
after
it
;
contracted in terms, not of commodities, but of money. This complicates the issue. If increased
production has no effect in reducing prices, money incomes will increase in the same proportion as and the rates of taxation production increases needed to yield a given revenue will be diminished to exactly the same extent as they would be under a system of payment in kind. In fact, however, an
;
increase of production tends, other things being equal, to cause a fall in prices, and if, as is to be
expected, the increase is not confined to this country, is world- wide, a very considerable fall. But, when prices fall, a given volume of production is
but
represented by a smaller money income. If, for example, production doubles, but at the same time prices fall by a quarter, the sum of real incomes will
be doubled, but the sum of money incomes will only be increased to one and a half times the former amount. This does not prevent the increased productivity from having its full effect in lowering the rates of taxation needed to finance normal government
expenditure, because a government that still wishes to buy the same quantity of things and services
as before will
much money
now require only three-quarters as revenue. But the position is different
as regards government expenditure on debt charges. The money revenue needed to meet these is the
200
WAR
CH.
as it was before. Real incomes all round have been doubled, but money incomes have only in-
same
creased in the proportion of 3 to 2. Consequently, the rates of taxation required to finance war debt will not be halved, but only reduced in this latter proportion. It should be added that an increase
in productivity up to double its existing amount in any short period would be a very exceptional occur-
rence.
It
has been calculated that in recent times
the average increase has been about 3 per cent per annum. Hence, while the case for a special levy to
wipe out war debt
is weakened in some degree by the prospect of increased productivity, it is not weakened very much, and is certainly not weakened
to so great
sight.
an extent as
it
might seem to be
at first
XV.
There remains a third consideration. In Chapter it was observed that, as a consequence of the
;
war, the value of gold in terms of things has greatly fallen throughout the world or, in other words,
gold prices have everywhere greatly risen. Moreover, owing to the depreciation specific of sterling in terms of gold, sterling prices have
that
* '
It was risen substantially more than gold prices. that in future are years gold prices likely, argued
through the operation of causes acting on the side of currency, to move, by slow degrees, nearer to the
booms, they tend

this
pre-war level than, on the average of slumps and to stand now. Whether or not
happens,
it is
practically certain that the British
endeavour to restore the pre-war i between sterling parity sterling and gold, so that
will
Government
xvii
shall

again
201
be worth 4-86 gold dollars instead of, as at present, a little under 4 gold dollars. Hence, while the prices of things in terms of gold
are likely to fall through currency causes, the price of gold in terms of sterling will almost certainly fall.
This means that, apart from the oscillations of business cycles, the prices of things in terms of sterling will probably trend downwards to some
extent,
and may do so
fall
to a considerable extent.
If,
however, a
comes about,
of prices due to currency causes the money incomes, representing
given real incomes of the people, must fall correspondingly. Hence, in order to raise a given money
revenue to meet debt charges, the government will have to impose rates of taxation higher perhaps much higher than are required now. We must
upon
is
not, of course, ignore the effect of a fall in prices that part of government expenditure which
not concerned with the debt. This expenditure should be reduced proportionately with the fall in prices. Consequently, the aggregate money revenue
needed by the government
will not increase, rela-
tively to the aggregate money income of the country, to the same extent as the part of the revenue that
is
required for debt finance. Still, the proportion between these two aggregates, and, therewith, rates of taxation, must increase to some, and may
increase to a substantial extent.
These considera:
The heart of the matter can be tions are important. if prices are set out in a crude statement thus halved through currency causes, the tax-payers will
have to pay to fund-holders the equivalent of twice
202
as
WAR
:
CH.
many things as they have to pay now fundholders will gain and taxes will increase to exactly the same extent as they would have done if prices
had remained constant and all war obligations had been doubled in amount. The imposition now of a special levy to wipe out debt would protect us from this danger. This is a strong point in its
favour.
6.
We may
now, leaving aside speculations
as to
interest rates, productivity and price levels in the future, come back to the central argument. Broadly
put, the case for a special levy is that, by enabling the high rates of taxation, which would otherwise
be necessary, to be reduced, it would encourage work and saving, and so indirectly stimulate national This central argument is open to productivity. several objections, which have now to be considered. The most far-reaching of them may be summarised
that high annual taxation over a long term of years is injurious, is there any reason to suppose that a single levy to wipe out debt, which, though it only takes place once, must be enormously larger than the contribuas
follows.
"
Granted,"
"
it
is
said,
tion of any single year under the taxation system, Will not the greater size of will be less injurious ?
the levy cancel the benefit of its less frequent im" This objection, in the above general position ? form, is not valid. special levy to wipe out debt
must be assessed on the
basis of existing facts,
on
the capital that people have now, or on the income that they have now, or, at all events, on the basis of
some
objective criterion that
is
known now.
Con-
xvii
203
sequently, whatever different individuals have to
pay it does not matter whether they have to pay once or are allowed to pay in instalments is fixed independently of their future conduct. Thus, a special levy of, say, 200 per cent of a man's current income is roughly equivalent in yield to a permanent income-tax of 10 per cent. But, whereas the perat
manent 10 per cent tax implies that one-tenth of whatever he may get in the future by work or saving will be taken by the government, under the 200 per cent single levy, he will have to pay a definite amount, fixed once and for all and, however much he may increase his income in the future, he will not have to pay anything more. Unless, therefore,
;
people are afraid of further levies, the single levy plan is bound to hurt production less than the continuing tax plan. But the qualifying clause in the
brings
last
sentence
very important objection. The of a imposition large special levy for the purpose of off debt cannot fail, it is said, to create an paying
up
new and
it will be repeated, not merely to debt that the first levy may have left wipe any but it also, standing, may be, for purposes not connected with debt redemption at all. This ex-
expectation that
off
pectation will discourage people from saving and so adding to the capital stock of the country, and
this
check to capital will react injuriously on pro-
ductivity.
it
The
injury wrought in this
way
will,
It cannot, moreover, urged, be very great. be prevented by any assurance of the Cabinet, or even of Parliament, that a repetition of the levy
is
20 4
is
WAR
CH.
effectively
not contemplated, because no government can bind its successors.

'
to
There is force in this argument. But it is open an effective rejoinder. So long as a capital levy forms a plank in the programme of an im'
portant political party, the fear that a levy will be

It is even arguable that, a levy had actually been made, people would feel that things were settled, at all events
imposed
exists already.
when once
for
a considerable time, and would, therefore, be actually less fearful of the future than they are now. In any event, it must be remembered that,
if
the levy policy is rejected, there is the certainty of long-continued high taxes. Will not this be more damaging to enterprise than the speculative fear
of a distant and uncertain danger
?
There
is
is,
however, yet another line of attack.
It
often argued that the process of paying a large levy could not be carried through without com-
and commerce and however theorists that, therefore, speciously may urge that the repayment of debt by means of such a levy would promote national productivity, in This conpractice it must enormously diminish it.
pletely dislocating industry
;
tention
is
expressed in several forms.
First, it is
argued generally that any levy plan involves withdrawing an enormous sum of capital from industry, thus robbing it of its means of life. This, however,
Industrial capital consists of factories, is not so. machines, materials and the store of goods out of which real wages come. None of these are withdrawn. The utmost that can happen is that so
xvii
205
much purchasing power is taken by the government from one set of people (the payers of the levy) and handed over to another set of people (holders of war This can have no loan) inside the same country.
upon industry in general. Secondly, being granted, it is argued that capital would, nevertheless, have to be withdrawn in large masses
direct effect
this
from particular industrial concerns, that this capital would probably not be immediately replaced, and
that, therefore,
many concerns might be

is
forced to
close
down.
This argument
is
more
substantial
than the other.

the difficulty
suggests.
It points to a real difficulty.
But
The
smaller than the argument reason is that the main part of the
much
industry of the country is in the hands of public companies, and that these companies, not being
subject to the levy (though, of course, their shareholders are subject to it), cannot suffer any with-
drawal of capital.
So
far as the
There remain private concerns. owners of these possess resources out-
side their business
war
not serving as security for loans

the levy
It is true,
stock, for example, that is sufficient to meet
upon them, they would be

however, that
is
able to manage.
if
resources
locked up
firms, the whole of whose in their business either
directly or as collateral for loans,
had
to
meet a
large levy
once, they might be broken and their business largely destroyed. For such firms it would
all at
be necessary to make special provision. This can and should be done by permitting the Treasury, when good cause is shown, to accept payment (with
interest) in instalments spread over a definite
number
2o6
WAR
CH.
of years. There is no reason, and, indeed, it would be very undesirable, that this method of payment should become the normal one. But it might approIn like priately be used for the relief of hard cases.
manner, for any imposts levied upon professional other owners of the immaterial capital of personal qualities, government would, no doubt, have to be content with a series of annual payments rather than with a large lump sum. In a later paragraph something further will be said on the subject of these imposts but they are bound, in any event, to be of small importance relatively to the imposts on owners of material property. There remains the argument that, even though
men and
a special levy
would not
injure industry directly
through real capital, it would injure it indirectly through finance. In order to raise the money to pay their quotas, people, it is said, would be compelled to throw securities on the market to such an
extent as to cause a serious fall in values, and this would not only dislocate arrangements for loans on collateral, but would give rise to a financial panic,
with inevitable repercussions upon industry. This argument rests on a misconception. Even though the levy had all to be paid in actual cash, since the proceeds would be employed in paying off holders of war loan, these people would presumably have about
as
much money
seeking securities as the payers
levy had securities seeking money. Any momentary gap between the time of the levy and the time of using it to buy war loan could easily be adjusted through the banks. There is, therefore,
of the
xvii

to fear anything like a general
207
in
no reason
slump
values, though, of course, some particular securities might suffer a little relatively to others. But this is
not the whole answer.
There would be no need
to
require payment of the levy in cash. Payment in war loan stock would be even more acceptable to the
Treasury, and payment in other first-class securities not less acceptable. Arrangements might also be
as under the German Capital Levy Law, by means of a specially created institution for holding property on behalf of the State, to permit people who
made,
securities, or
It is
so desired to pay in other less readily marketable even in some forms of real property.
ments on these
very unlikely that, with reasonable arrangelines, any considerable part of the
The conlevy would, in fact, be paid over in cash. tention that the imposition of a special levy would
damage productivity through
sions
its
financial repercus-
is, in short, devoid of substantial basis. 7. Were we, however, to stop at this point, we should not have a true picture of the situation. The
whole of our discussion so
far has
turned on the
assumption that a large special levy to wipe out debt is an alternative to, and a means of avoiding, high
This assumption may be denied. If, it be may argued, a levy is imposed, and, in consequence, the annual revenue required to provide interest and sinking fund on the debt greatly reduced, the result will be, not lessened taxation, but increased extravagance on the part of the government. Having found that it is possible to maintain, for example, an income-tax at a standard rate of 6s. in the
taxation.
208
WAR
CH.
the government will merely use the saving on debt interest as an excuse for more spending ; so that in
the end, instead of the levy being a substitute for
will turn out to have been an This argument is, from a practical standpoint, a very important one. There can be no doubt that, when so large an amount of revenue has to be raised that the tax system is strained, this fact strengthens the hands of the
high annual taxes,

addition to
it
them
opponents of public wastefulness. The argument, " the country cannot afford unnecessary officials, and so forth," has a greater backing of votes when the budget is 1000 millions than when it is 200 millions. It is true that against this must be set the attitude
of mind of the spending departments themselves. With a budget of 1000 millions, such a sum as, say,
10 millions seems a bagatelle, whereas, with a 200

million budget, it is a grave matter. This consideration is, however, almost certainly outweighed by
that just set out.
On
the whole, a wiping out of
war debt would weaken the country's defence against government extravagance. This, however, is not the whole case. Not all
government expenditure are waste. A government may easily be accused of extravagance because it has increased its expenditure on educasorts
of
tional services, the

'
payment of old age pensions, or other socially ameliorative enterprises. The cry, we cannot afford this,' may, in short, be directed
against
good things
:
even happen that
it
as well as against bad. It may is more effective against the
good things
that the Treasury, for example, has
xvii
209
greater success in vetoing a 10 million increase in educational charges than in clipping, to the extent of ' 10 millions, the wings of some unduly grandiose
*
ministerial establishment.
This
is
a real danger.
There
it is
are, of course, limits to the extent to
which
for the national advantage for the
spend money on social though not entirely, dependent on the proportion between the real income of the country and the real expenditure which it undertakes through the agency of the government. So far as the budget is swollen by charges connected
to
limits are chiefly,
government betterment. But the
with internal debt, it does not represent this real expenditure, because the money raised to meet the charges is not spent in any ordinary sense, but is merely transferred from one group of citizens to another. This fact not being generally realised, the
case against further government expenditure has an appearance of greater strength than properly belongs
to
it.
No
;
spending
doubt, this helps resistance to wasteful but it also, at least equally, promotes
resistance to wise
and desirable spending.
This
is
Should new government expendia fair rejoinder. ture be undertaken in consequence of the relief to
the budget brought about by debt repayment, it is gratuitous to assume that it will all be mere waste.
Some of it, at least, is likely to be expenditure which ought to be undertaken, but has not been undertaken hitherto because of the technical difficulty of enlarging an already enormous budget, coupled with the inability of the public to understand the distinction between taxation for real expenditure
P
210
WAR
CH.
and taxation
that
It is true for interest on internal debt. good government expenditure, equally with
bad, involves a forcing up of tax rates. But, since good expenditure is, almost by definition, expenditure the advantage of
which
is
greater than the
disadvantage involved in raising the money for it, such increase of rates as it involves cannot be taken
to cancel the original lowering of the rates for which The whole of that lowering a levy is responsible.
must be counted
to the levy for righteousness, even the country decides, after the lowering has though been accomplished, to put rates up again in a cause
that
it
considers worth the
damage
to production
that high rates involve. may conclude, therethat the case for fore, keeping debt unrepaid, as a
We
means of dragooning spendthrift governments, is not a strong one. The balance of argument so far
is
in favour of imposing a special levy to secure quick cancellation.

8.
Up
to this point, however, attention has
been
confined to the effect which the policy of a special levy for debt repayment would be likely to have
on national
productivity.
Nothing has been said
about distribution. Plainly, however, our provisional conclusion in favour of the levy policy might be reversed if it could be shown that that policy could not be carried through without great unfairness. It is sometimes maintained that in fact great unfairness
is
inherent in the policy.
If,
it
is
said, the
present generation pay off the whole, or the bulk, of the war debt by a special levy, people now living will have shouldered the whole costs of the war.
xvii
211
But the benefit in security and so forth that the war may be supposed to have won for us will be enjoyed also by future generations. It is reasonable, and, therefore, that they should pay their share
;
a special levy, they will not do this. the light of the analysis set out in Chapters IV.
if
there
is
In
and
VIII.
it
is
argument.
It
not necessary to delay long over this has been shown that the way in
which the real burden of war costs is distributed between the future and the present is determined by the extent to which the individuals who actually finance war at the time it is being waged draw upon resources that are, or would normally have become, capital. What they have done in these
matters cannot be altered by any post-war financial and, though, no doubt, as an indirect operations consequence of these operations, the extent to which
:
individuals
now
decide to create
new
capital
may
be indirectly increased, the benefit which this confers on the future cannot properly be said to be at
the expense of the present.
as
The
question of fairness,
between
different generations,
may,
in short,
be
set aside.
9. Plainly, however, the question of fairness between different people among the present generation cannot be dismissed in this way. It has been
claimed that the policy of a special levy involves fundamental inequities in this matter, which suffice to condemn it in principle without reference to any
particular
it
it
is
said, a levy is
hits
proposed. Thus, be unfair, because indifferently people who have already suffered
it
form of
that
may be
to
bound
2i2
WAR
CH.
heavily on account of the made fortunes out of it.
A man whom
is
war and people who have the war has
already deprived of half his wealth is now, it is said, threatened with the further loss of half of the re-
mainder, and the war profiteer
treated in
no way
differently. general drift of this contention is, of course, correct. It is not, indeed, suggested that,
if one of two men, who had equal fortunes before the war, has lost half his fortune while the other has doubled his, the two men would, under a levy, be
The
mulcted equally by the State. They would not even be mulcted in equal proportions because the levy would presumably be graduated so that richer men paid at a higher rate than poorer men. But it is suggested, and it is true, that, in the assessment of a special levy, no allowance is generally contemplated for the losses that some persons have incurred during the war and for the gains that other persons have made. If, however, this fact is used to condemn a special levy, it must equally be used to condemn the whole body of existing taxes for no one of our taxes, whether direct or indirect, makes
y
allowances of this kind.
The
truth
is,
and
it
has
only to be stated to be perceived, that this argument, though pro tanto a valid argument in favour of the exceptional taxation of war fortunes, if that should
prove to be practicable, is not a valid argument against a levy on all wealth designed to wipe out war No doubt, if the issue to be decided was debt. between this type of levy and a war wealth levy calculated to yield an equal sum, the argument would be
highly relevant.
But nobody has ever supposed that
xvii
213
a war wealth levy can yield enough money to make any decisive impression on the national debt. It
is
not, therefore, an alternative, though it may be a supplement, to the wider type of levy. The only alternative to that is continued high annual taxation
of the ordinary type over a long period of time. This taxation fails, in exactly the same way as the
levy
would fail, to discriminate against war wealth. Plainly, therefore, the fact that the levy fails to do this cannot properly be used as an argument against it.
strikes
it
Again, it has been argued that a levy, in so far as accumulated capital, is bound to be unfair, because it mulcts people who have saved money during the war and lets off those who, with equal
opportunities but less patriotism, have squandered their money in luxurious expenditure. That a
But, levy must act in this way is, of course, true. here again, exactly the same thing holds good of the alternative system of continued high taxes. A man
who had
10,000 a year during the war was taxed If he saved half 10,000. during the war on that of it, he will be taxed again in the future on all the income that the saved half yields but, if he spent all of it, he will not be taxed again at all. This incannot be remedied equity by any action open to the
;
government now except resort

lation.
No
attempt
is
made
to
to retroactive legisremedy it in any
existing tax.
The
fact, therefore, that it
would not
be remedied in a special levy, which is an alternative to some existing tax, cannot properly be used as an
anti-levy argument.
Yet again,
it
has been urged that the imposition
214
WAR
CH.
would be
of a levy, so far as it strikes accumulated capital, in substance, though not, of course, in form, a breach of faith with all the people whom the
government persuaded during the war to purchase war loan. Now, of course, if it was proposed to make a levy on holdings of war loan from which other forms of private wealth were exempt, this charge would be justified. But no such proposal has ever been made. War loan would be treated in exactly the same way as certainly it would be treated no worse than other forms of property. It has always been understood that income from ordinary war loan
will
be treated, for taxation purposes, like other income. There is no inequity, therefore, in treating ordinary war loan capital like other capital. On this
general issue there
is no room for serious dispute. There are, however, two subordinate considerations to which attention should be called. First, it is sometimes argued that, though in theory a levy would not discriminate at all against the holders of war loan, yet in fact it would do this, because, since everybody's holdings of war loan are recorded at the Bank of England, any levy made in respect of them would be certainly recoverable, whereas some holders of other forms of property would probably,
tions.
by concealment, evade a part of their lawful obligaThis is, no doubt, true but evidently,
;
though
affords a strong argument for making the collection of any levy that may be imposed as effective as possible, it cannot serve as sufficient
it
ground
for refusing to
contention were conceded,
impose a levy. If such a it would be impossible
xvn
to

at all
;
215
impose any tax
for always
some people
are in a stronger position than others to evade their lawful obligations. Secondly, there is a small
that
amount some 20 millions of 4 per cent war loan was issued free of income-tax and war savings
;
certificates are also free of
income-tax.
In so far
as a levy
regarded as an alternative to income-tax, the holders of these securities have a valid claim for
is
exceptional treatment under any levy that might be imposed. What exact form this exceptional treat-
ment should take need not be considered here. The amount of money affected, in comparison with
the general scale of our problem, is trifling. It is enough to note that some special adjustment in this
matter
is
necessary.
Taken
in
the
broad,
the
arguments about unfairness that have been reviewed above are, in my judgement, quite inadequate to overthrow the favourable view of a levy policy, to which we have been led by a consideration of its
probable effects upon national productivity. 10. Let us now suppose that the policy of a special levy is accepted in principle. It then becomes necessary to face the difficult task of
framing a satisfactory basis of assessment.

to
Here
the most fundamental issue turns on the treatment
be accorded, on the one hand, to owners of material capital and of income derived from material
capital, and,
on the other hand, to owners of the immaterial capital of personal capacity and of " " income derived from that. A levy on capital is usually thought of by the public as being concentrated
exclusively
on owners of accumulated
2i6
WAR
CH.
wealth, and as leaving aside altogether owners of immaterial capital. Such a partial levy is plainly
unjust.
to yield
One man, we may

him an income
of
imagine, has spent

that is expected 1000 over the next
10,000 in buying
some property
fifteen years ; another has invested the same sum in training and developing his own mental powers in such a way as to enable him to earn 1000 a
year for the next fifteen years. levy as ordinarily understood the
Under
first
a capital
of these
men
would be hit and the second allowed to, go free. There can be no warrant for this. Moreover, if
the levy
is
conceived, as
have suggested
it
may
be, as a substitute for future taxation, it is plainly proper that those who have the power to earn
income, since they will benefit from the reduction of future taxation, should bear a share of the levy. Unless they are made to do this, the imposition of the levy will have the effect of substantially altering the burden borne by different citizens, to the advantage of those possessing the immaterial
capital of capacity to
do profitable work and to the
disadvantage of those possessing material capital as ordinarily understood. This shifting of burden
is
exactly similar to that which would occur if the policy of a levy were rejected in favour of the orthodox system of annual taxation, but the rates
or investment, income (i.e. income from property) were largely raised, and those on earned income largely reduced. Of course, it is open to any one to maintain that the existing discrimination between the rates of income-tax on
of tax on unearned,
xvii

is less
217
it
the two sorts of income
favourable than
ought to be to earned income. But nobody would and propose exempting earned income altogether in be this is what, in substance, would done, respect of whatever tax revenue was affected, by relieving
;
future taxation through the agency of a levy imposed upon material capital alone. Equity, therefore, requires that the special levy should not be imposed
upon material capital alone, but that the power to make earnings should also somehow be brought
under
ii.
it.
Granted that owners of accumulated wealth and owners of immaterial capital are both to be brought under contribution, it has still to be decided whether assessment should be made upon them on the basis of capital in a wide sense (including immaterial capital) or on the basis of income, or on a This problem will be considered mixed basis. that of national profrom three points of view that of administhat of and ductivity equity
:
trative technique.
On
is
the side of productivity
all
that need be
fallacy.
done
It is
to clear out of the
way
common
often argued that imposts
on
capital are necessarily
more
injurious than imposts
on income, because
they trench, in a way that imposts on income do not, on the productive equipment of the country. This is a blunder. It arises out of a failure to distinguish
between the object on which an impost is assessed and the source out of which it is paid. An impost assessed on capital may quite well be paid out of income, and one assessed on income out of capital or,
2i8
WAR
CH.
what comes to the same thing, out of resources, which, apart from the tax, would have been turned The choice of the object of assessment into capital.
does not, in short, determine the source of payment. Nor, in general, does it have any significant effect upon the source of payment. Suppose, for example, 100 from a that the government decides to take man with 10,000 of capital yielding 500 of income. It can do this either by a 20 per cent income-tax
by a i per cent capital tax. There is obviously no ground for supposing that the man will take the 100 he has got to pay from one source if the tax is called an income-tax, and from another if it is
or
The widespread confusion of called a capital tax. this matter arises in a very on that exists thought
simple
way.
larger
As
matter
of
practice,
imposts
assessed on capital, such as death duties, call for
much
assessed
payments at one time than imposts on income. The larger, however, an
which
impost becomes, the greater is the proportion in it is likely to be taken out of capital. If, for than more a in has to a man year pay example, his income for the year, he must draw on capital. It is easy to imagine death duties on about the present scale assessed on a basis, not of capital
values, but of the income in the last completed year before death. Nobody would contend that a change
of this kind
would
alter the extent to
which death
It is the same with duties are paid out of capital. Given the amount of the levy, it a special levy.
would make very little difference to the source out of which it comes, and, therefore, to national pro-
xvii
219
ductivity,
whether the basis chosen for assessment
were
capital or income. I turn to the question of equity.

it
For ordinary
annual taxation
income
is
generally agreed that annual a fairer basis of assessment than capital.

is
Of
course,
if
every
100 of income implied exactly

capital (material or immaterial)
the same
amount of
between income and capital as a basis of assessment would have no significance. When 100 of income is derived from 2000 of capital, it makes no difference, interest being reckoned at 5 per cent, whether income is taxed 20 per cent or capital i per cent.
as the source of the income, the choice
In either event exactly 20 a year is raised. But, in fact, the relation between income and the capital from which it is drawn is not the same for all
incomes.
Thus, one property

;
is
expected to yield
expected to yield
100 a year for ever
another
is
nothing about
interest
at all for ten years, and, thereafter, to yield 163 per annum for ever. If the rate of
is
and remains 5 per cent, the first of these properties is worth now, and will continue to be 2000. The second is also worth worth, exactly
now
(approximately)
2000,
but
its
value
will
gradually increase, until after ten years it will become 3260, thereafter remaining at that figure. Under a 20 per cent income-tax the former of these
properties pays
latter
:
32 have equal present values, and, since the two proIf, however, perties are equal, this is clearly right.
:
the 20 a year from now onwards pays nothing for ten years and, thereafter, 12 o a year. These two sets of payments
:
220
WAR
CH.
capital is taken as the basis of taxation, the former 20 a year from now onproperty, as before, pays
wards
but the
latter,
besides paying
32
12
a year annually after ten years have passed, also pays during the first ten years an annual sum 20 and gradually rising to 32 12 o. starting at
: :
In the aggregate, therefore, it pays more tax than the other, although its present value is equal to that of the other. What happens in effect is that the income after ten years is taxed both when it
arrives
and
also in anticipation of its arrival.
We
thus see that the adoption of a capital basis for annual taxation causes properties which are exto stable properties
pected to appreciate to be taxed too much relatively and, by parity of reasoning, it causes properties which are expected to depreciate
;
to be taxed too
little.
It is true that against this
disadvantage of the capital basis there has to be set an advantage. One property a holding of war
it
example may be worth 10,000 because another 500 a year of money income property a yacht, for example may be worth an equal sum because it yields an equivalent income, not in the form of money, but directly in satisfaction.
loan, for yields
;
taxable capacity of a man who owns his own 10,000 yacht is substantially the same as that of one who, having 500 more of money income,
The
this in hiring a yacht from somebody else. the income basis of annual taxation, since income-tax takes account only of money income,
spends
Under
the yacht owner goes free, but the yacht hirer is hit. Under the capital basis this inequity disappears, and
xvii

men
are taxed equally.
221
both
This advantage of
the capital basis must, as I have said, be set against On balance, the disadvantage described above.
however, there can be

advantage Moreover,
it
little
doubt that the
dis-
is
the
more wide-reaching
of the two.
if
difficult to see
the capital basis were adopted, it is how the disadvantage associated with
;
could be palliated
while that associated with
the income basis can be, and has been, in some measure met by the imposition of special duties such as the motor-car tax on possessions that
income of amenity. sometimes thought that the reasoning which has led to the general adoption of an income basis for ordinary annual taxes can be extended, without
yield an
It is
further debate, to the assessment of a special levy. Indeed, certain critics of current proposals for a
on capital have believed that these proposals can be overthrown by the citation of familiar arguments against annual property taxes. This is a
levy
mistake.
The
fact that
income
is
a better basis
than capital for continuing annual taxation is no evidence that it is a better basis for a special levy In fact, it can to be raised on a single occasion. be shown to be a worse one. The objection easily
to a capital basis for continuing taxes is that on this basis properties yielding little or no return now,
but destined to yield a substantial return presently, are taxed on their future return both now and also When we have to do, not with in the future. continuing taxes, but with a single levy, this objection changes sides.
If the
income
basis
is
adopted,
222
WAR
CH.
people with capitals that are of great value because they are expected to yield income some years hence
will
pay nothing at all. Plainly, they ought to pay. For annual taxation the income of the year, supplemented, perhaps, by special amenity duties on
certain durable consumption goods, is the fair basis, because the income of every year is subjected to tax. For a single levy ability to pay depends, not on the
income of the particular year in which the levy is made, but on the prospects of income over a considerable period. Capital measures this, but the income of the current year frequently does not. Moreover, the owners of such things as yachts and pearls and motor-cars, who may or may not be hit
for
annual
purposes
duties, are fairly sure to escape unless this is based on capital.
by supplementary amenity under a special levy For these reasons it
seems
clear that, from the point of view of equity, capital is a better basis than income for the assess-
ment of
a special levy.
There remains administrative technique. Under The assessment upon this head one thing is clear. owners of the immaterial capital of personal capacity cannot practically be made in the form of an assessment of capital. Such a task the revenue authorities could not reasonably be invited to undertake. The capital value of a man's capacity to earn so much income depends on the man's expectation of life, and so would be different for men in similar occupations but of different ages. Account would have to be taken too of prospects of promotion and,
;
in strictness, not merely of existing capacity, but
xvii

do
;
223
Clearly this are in the region of fiscal dreams. The assessment of owners of immaterial capital must be made by way of income. There are several
also of capacity to acquire capacity.
will not
we
The simplest this could be done. that material capital alone should be assessed for the special levy, but that the resultant injustice to
ways in which
is
property owners, as against rich professional men, should be countered by a readjustment in the relative rates at which earned incomes and investment
incomes are assessed to income-tax. Since the special levy on material capital would represent the conversion of so much tax on investment income, investment income would be entitled to a relief from future income-tax to which earned income has no claim. There are, of course, other alternative ways in which the required adjustment could be made. In accord with the general argument set out on pp. 202-3, we ought, if possible, to choose one that makes future imposts depend on incomes and prospects as they exist now, rather than on future incomes for then work will not be discouraged. For the present purpose, however, it is not necessary
;
to consider this matter further.
It is sufficient to
recognise that the evaluation of immaterial capital for the purpose of a special levy is impracticable, and that the owners of such capital must be brought
under contribution somehow through their incomes. As regards owners of material capital considerations of administrative technique are less decisive. Clearly there is some advantage in making income,
rather than capital, the object of assessment.
In
224
WAR
of
CH.
the United
Kingdom an enormous mass
know-
ledge about people's incomes is already in the possesThe machinery of sion of the revenue authorities.
income-tax administration could readily be turned on to assess a special levy, at whatever rates were desired, on the basis either of current incomes or of the average of incomes over, say, the last three
If, on the other hand, a special levy had to be assessed on a capital basis, the problem of a general valuation would have to be faced. For some sorts of property this would not be a very serious For wealth the titles to which are held in matter. the form of securities a simple return could be asked for, and it could be checked to some extent by means of the knowledge already in the hands of the inFor securities for which there spectors of taxes. is a wide market values could then be satisfactorily determined by reference to the prices that had ruled in the market over some assigned period. For securities that are not often dealt in it would be more difficult to make a fair valuation. Property
years.
not represented by securities would present much Here, either immediately or, at all events, as an ultimate check on the returns, there would have to be a special appraisement by
greater difficulties.
valuers. Private businesses, houses, furniture, jewellery, works of art and other such things would all, so far as it was decided to include
government
them under the levy, have to be treated in this way. It would be impossible to carry through such a
general appraisement quickly, and
fail to prove
it
could hardly
both
irritating
and expensive.
These
xvn

however,
alternative
225
difficulties,
least three
insuperable. At of ways dealing with them

are
not
are available. First, all persons prima facie liable to levy might be required to send in a valuation of their properties by some assigned date. On this valuation they might be assessed in the first instance.
Thereafter, government appraisers might set to work and gradually, during the course of several years,
might go through these private valuations and, where necessary, correct them. After the proper valuation had been finally determined, any adjustment required on account of the corrections might be effected by payments from the tax-payer to the
Exchequer or
vice versa.
first
be assessed in the
sents
Secondly, the levy might instance on the basis of those
kinds of property only, the valuation of which pre-
no
difficulty.
Such
things
as
furniture,
jewellery and works of art might be left over till each several property comes up for valuation in the
course at the owner's death. Then the ordinary death duty assessment might be supplemented by a further assessment in respect of postnatural
poned
special levy
upon
these things.
The
dis-
advantage of this method is, of course, that it makes difficult the proper graduation of the levy. The
rate of levy should vary with the aggregate size of different properties. If only a part of these pro-
perties is
is
brought under review when the main levy assessed, this cannot be done. Any error that results might, however, be corrected by manipulating the rates at which the supplementary levy is assessed later on. Thirdly, elements of property
226
WAR
CH.
which are exceptionally intractable to valuation might be left out of assessment altogether, on the ground that, though this would, undoubtedly, be
amount of unfairness must, be endured in order to avoid administrative complications. Clearly, no one of these devices is wholly satisfactory, and this fact is, so far, an argument against making capital the basis
unfair, yet a certain as in all tax matters,
of assessment.
It is well to
remember, however, that,
in view of the large amount of property that is held in the form of securities, probably not more than
one-quarter would involve any serious

in valuation.
difficulty
Moreover, even though a very large
proportion of the objects specially awkward to value furniture, jewellery, works of art and other forms
of consumption capital were left outside the range of capital assessment, the capital basis might still
for on the be much better than the income basis income basis all these things are ignored completely.
;
the whole, balancing equity against convenience, I am inclined to sum up in favour of the
capital basis, subject to the condition that the precise range of capital which it is worth while to
On
include
experts.
is
studied
and
determined
is
by revenue
It is desirable to
words, because the point
add, however, in so many not always understood,
that the decision for or against the broad policy of a special levy is not dependent on any conclusion
that
we may come
to about the basis of assessment.
special levy on property- owners could, if it were so desired, be assessed on the basis of their income.
It
does not stand or
fall
with any particular plan,
xvii
227
or, indeed,
with the whole body of possible plans,
for
making a valuation of capital. 12. Whether a capital or an

it
practical for a special levy, to define carefully the range of persons to be covered. It would seem prima facie that the net should be spread wide
decided upon,
income would be necessary, in any
basis
is
scheme
enough
to cover all
owners of property situated in
England, except the owners of temporary bank balances, and all regular residents in England wherever their property is situated. As with income
tax,
however, there are bound, in this region, to be

difficulties of detail, for
which no perfectly be found. Moreover, satisfactory there are other delicate points that have to be The most important of these concerns the settled. relation between natural persons (i.e. individuals) and fictitious persons (i.e. companies and corporaIn the United Kingdom income tax is tions). assessed on the income accruing to individuals through companies in which they have shares, and also on that part of the income of companies which is not distributed to shareholders but passed to reserve. This analogy suggests prima facie that under a special levy both the shares of companies in the hands of shareholders and also the reserves of the companies should be assessed. But this is
many
solution
can
The capital value of the shares represents the whole value of a company's property, including the reserves in whatever form they may
incorrect.
be held.
When, therefore, share capital has been assessed in the hands of the shareholders, all that
228
there
WAR
CH.
To come down is has been assessed once. on the companies again would involve double taxation. Companies, therefore, should be left
whose property
The position of corporations not represented by shares, such as universities, colleges, churches, clubs and so forth, If they are not made subject is, however, different.
outside
the
levy.
is
to the levy in their
own
persons, their property will
escape altogether. In principle clearly it ought not to escape, though it is arguable that certain sorts of corporations of special public utility should be exempted for the same reason that the income
of charitable trusts
is
exempted from income
tax.
If they are not exempted a further difficulty has to be faced. scale of levy graduated appropriately
to individuals could not

It
be applied to corporations. for example, to make an institution like a college, comprising a large number of persons, and possessing, say, a million pounds,
would be absurd,
contribute as large a quota as an individual millionIt would be necessary, therefore, to fix, for such corporations as it was decided to assess, some general arbitrary flat rate substantially below the maximum rate under the scale. This plan should probably be extended to cover municipalities and
aire.
other local authorities.

requires that trade
it
logic of the situation unions, friendly societies and
The
co-operative societies should also be assessed, though might be proper, in view of the comparative
poverty of most of their members, to apply a different and lower flat rate to these bodies.
13.
A more fundamental problem is to determine
xvii
229
the rates of levy proper to people of different degrees of wealth. Everybody would agree that under a
special
levy, as under an ordinary income-tax, people below a certain level of wealth should be
altogether, while, for people above that the rates of levy should be made to increase level, with increases of wealth, in such a way that, if one
exempted
man's wealth exceeds another's in any given proportion, his levy payment should exceed the other's
in a larger proportion. It is impossible, however, to lay down any general principle in accordance with which either the level of the exemption limit
or the form of the graduation scale should be determined. As with income-tax, so also here we are
forced to rely on the subjective judgment of governing persons as to what, on the whole, seems to them to be reasonable.
14.
This problem of distribution as between

wealth
is
people of different degrees of
exactly
which arises in connection with income-tax and involves no niceties. The problem, however, to which we now turn, of distribution as between single persons, married persons without children, and married persons with large families
analogous to that
has,
in
connection with a special

itself.
levy,
puzzles
peculiar to
It is generally
income-tax purposes, a man should be taxed less than a man of equal income who has only a wife, and that such a man in turn should be taxed less than a bachelor. Would it be
proper to make the same class of allowances under At first sight, the answer to this a special levy ?
agreed that, for with a wife and family
230
WAR
CH.
question seems clearly to be yes. But there is a man may be a bachelor one year, a married man the next year, a married man with
difficulty.
five
children six years hence, and,

at all
all
it
may
be, a
widower with no children
Under income-tax
from year
are
to
seven years hence. these vicissitudes are followed
year,
made
for them.
and appropriate adjustments But a special levy is not an
annual tax ; it is a single impost raised once only. If allowances corresponding to income-tax allowances are made in it, the man who has a wife and
large family alive in the year in which the levy happens to be made is favoured as against the man who is a bachelor then, but is going to have a large
family in a few years' time. The advantage which the first of these two men obtains is plainly arbitrary,
and cannot be justified on grounds of fairness. For this reason the case for family allowances is very
much weaker under

income-tax.
a special levy than

satisfactory
it is
under
of
No
entirely
solution
the difficulty seems to be possible.
It is true that
arrangements can be imagined that would take account of a man's probable future family status
as well as of his actual status
under which, for

;
example, a bachelor of twenty would be treated but they would differently from a bachelor of sixty
almost certainly prove too complicated and too controversial for practice. Probably the most
generally
some allowances, but to keep them

15.
acceptable solution would be to make at all events among poor people,

small.
What
has been said leads up to yet another
xvii

In the United
231
problem.
Kingdom
there
is
a system
of graduated duties on properties passing at death, which, for large properties, are at a very high rate. If a man died immediately after his property had
been mulcted under the special levy, the remainder would at once be hit again. On this ground it may be argued that the special levy should be assessed at a lower rate on old men than on young men with equal incomes. But the inferof that property
ence
is
not well-grounded.
After
all,
young man
may
one.
die immediately after the levy as well as an old
culty
A more appropriate way of meeting the diffiwould be to make some allowance in respect of death duties for estates falling under them soon after they had paid the special levy. No allowance for age in the special levy itself seems to be called for.
1 6. The results of the foregoing discussion may now be summarised in a few sentences. In view
of our enormous budget requirements and of the consequent necessity for kinds of taxation and rates of taxes that are seriously repressive to industry, a large special levy for the purpose of repaying
internal national debt
is
desirable
from the stand-
point
of
national
productivity.
On
the
whole,
capital seems to be a better basis for the assessment of a special levy than income, though an assessment based on income would be easier to administer. If,
as in practice would certainly happen, the immaterial wealth of mental and manual earning powers proved intractable to assessment on this basis, it would be fair either to review the comparative rates of income-tax
upon earned and unearned incomes
in the light of this
232
if
WAR
CH.XVII
fact or to
make some other compensating adjustment.
made, should be graduated, and persons levy, below a certain limit of wealth should be exempt. The revenue authorities would need to investigate what, if any, categories of wealth it would be desirable, in the interests of administrative simplicity, to
leave outside the scope of the levy.
Payment of
levy quotas should be accepted, not merely in cash, but also in war loan stock and, probably, other
first-class securities.
Provision should be
made
to
allow of payment by instalments from persons to whom immediate payment would involve exceptional hardship.
The
imposition of a special levy
conceived on these general lines, the proceeds to be devoted to repayment of debt, would, if the decision to adopt it were accepted loyally and did not meet with organised obstruction, help forward the economic recovery of the United Kingdom. Detailed proposals and estimates of the amount of money that would be yielded by different scales of
made satisfactorily by the Inland Revenue authorities. Such inadequate study as I have been able personally to make suggests that a
levy can only be
reasonably graduated scale rising to a

.
maximum
of
in
between 40 per cent and 50 per cent might bring between 3000 and 4000 million
CHAPTER
XVIII
THE AFTERMATH OF GOVERNMENT CONTROL

i.
WITH
arose a keen discussion as to
the ending of the war there inevitably how far the widespread
control over industry, that governments everywhere had gradually come to exercise, should be retained.
Everywhere in actual fact controls were relaxed. But this relaxation was bitterly opposed. It was argued that, under the impulse of uncontrolled
private profit seeking as it normally operates, resources are used up in pandering to the whims
-
of the rich, while essential needs of the mass of the community are still unsatisfied. Thus, at a time
there is a crying shortage of houses, and when the transport of essential articles is held up for want of railway wagons, some 200 millions a year are
when
being spent on pleasure motoring. In London alone there are 363 motor-car shops, many of them " with large show-rooms and a little army of
immaculately dressed showmen and others em1 Against this wasteful ployed in and about them."
result of
1
freedom
is
set the experience of the
war
Chiozza Money, The Triumph of Nationalisation, p. 29. 233
234
WAR
CH.
period, when the government compelled engineering firms to give up the manufacture of luxury goods
and concentrate upon the essential needs of the In war public action built national factories State. where energy was centred on social needs in peace
:
these factories are sold to profit-seeking private enterprise and at once diverted in large part to making luxuries. Had the public rule of industry
been continued into peace, it would have directed our national resources into the channels of reconthe building of houses, the re-equipof the railways and the overhauling of mines. Private enterprise freed from control failed to do
struction
ment
these things
for trivial
2.
it squandered the nation's energy and futile ends. This reasoning sounds very persuasive. But
;
there
is
a deep-rooted confusion.
The
essential fact
of war-time was that the government got into its own hands, by a combination of taxes, loans and credit creation, the predominant part of the purchasing
power of the country. It wielded this purchasing power to direct productive forces towards the common end of victory. It speeded up the transition from peace organisation to war organisashutting off certain sorts of production impelled people, instead of building themselves houses and so on, to hand their incomes over in war loan. But and this is the point unless the State had been prepared to take and use had,
tion.
it
By
indeed,
a great volume of deliberately sought purchasing power for itself, much of the control exercised over industry would have been futile.
xviii
THE AFTERMATH OF CONTROL
235
The purpose of the main part of it was either to enable the State's holding of purchasing power to be employed as effectively as possible, or indirectly,
by shutting
to
its
off rival uses, to
purchasing power. peace to continue the policy of absorbing purchasing power and using it for common ends, then, with
or without control on the side of production, houses could have been built for the poor instead of motor
cars for the rich.
Had
induce people to add the State chosen in
this,
But, unless it had chosen to do mere retention by it of control on the side of production would not have enabled these things to
be done.
If
purchasing power
is
so distributed
that the effective

cars, industry,
demand
is
for pleasure touring
things
if it is
however organised, must make these for jerry-built and cheap houses,
because people cannot afford to buy good houses, industry, however organised, must produce them. It may, indeed, be urged that the government ought
to control the distribution of purchasing power, and so to prevent it from being used in these ways in
peace just as
it
did in war.
'
For the
is
first
year or
two of
is
'
reconstruction
there
much
to
be said
for that policy.
impossible.
It
But, as a permanent policy, it is impossible, because to go
on, year after year, raising purchasing power by loans and credit creations can only lead in the
As
bankruptcy and general collapse. permanent policy, the State can only absorb for common purposes such an amount of pur-
end
to national
chasing power as
tion.
it
is
prepared to raise by taxato be a
This
is
bound
much
smaller
sum
236
than
it
WAR
CH.
was
raising in
war time by
:
a mixture of
for to press taxation, loans and credit creation taxation beyond a point is apt grievously to check the industry, enterprise and saving of the people, and
so to destroy the source from which it comes. With the very large State requirements to meet national debt charges and other unavoidable Treasury outgoings, the government naturally hesitates before plans the adoption of which would force the rate
of taxation to what
may
well be thought a dangerous
So soon, however, as its dominance over height. distribution is surrendered, its control over the
the
direction of industry over the purposes to nation's real resources are devoted
necessarily lapse also.
3.
which must
There
control
is,
however, another sense of governcontrol, not over the direction of
ment
which must not be confused with the

is
above.
That
industry generally, but over the internal policy of When the British Government particular industries
.
took over the railways it brought about a decidedly larger measure of co-operative working than had
been customary before. Thus, the trucks belonging to private colliery companies that were used upon the railways were pooled, traffic was deliberately regulated with a view to general economy instead of to the profit of competing companies, and so on. In like manner, attempts were made to organise coal distribution on a general plan, so that the several markets were supplied from mines near to them and Yet again, among the various cross-freights saved. firms turned on to munition-making, engineering
xviii
THE AFTERMATH OF CONTROL
237
government action led
to a sharing of information
about methods and processes, in place of the wasteful secrecy of normal competitive production. Undoubtedly this and other new forms of co-operation
were
responsible
;
for
considerable
economy
in
and the resumption of pre-war conproduction ditions might be expected to mean substantial loss.
the other hand, if separate concerns, having from the war the way to these economies, continue to co-operate, there may easily grow out
learnt
On
of
them powerful quasi-monopolistic
organisations,
able, if they choose, to
mulct the public heavily. Here is a serious dilemma. Nobody wishes to lose the economies which co-ordinated effort has shown but everybody is afraid that coto be possible ordinated effort under private enterprise may lead
:
to
arrangements dangerous to the out can be found only in an public. extension of government control over the internal
monopolistic
The way
policy of certain industries more especially railways and coal mines that formerly were left, in the
main, to their own devices. Whether control should be carried to the point of some form of nationalisation,' under which a publicly appointed body would
'
and operate these industries, or should stop short at supervision and regulation from outside, is a subject of hot debate. But that some control for the protection of consumers will need, henceforth, to be exercised over a fairly wide
actually take over
field is
now
generally agreed.
INDEX
econoAfrican possessions mic value, 20-21 ; as recruitment areas, 24 Agriculture bounties on, 12 protective duties and, 1 08 shadow of war and, 10-12 Air transport and defence requirements, 9-10
:
: ;
Bank
credits (contd.) capital drained by, 109
currency depreciated by, 161-2 expansion of, danger of, 162-6 gold reserve drained by,
methods of
see United States American banking system, new, 181 American exchange adjust-
America,
102, 103, 104, 105, 165 creating, 95107, no, 163-5
advances on
Ways and Means, 96-9, 101, 109,
ment
of,
of,
167, 169-73,
no, 163, 165 currency notes, 93, 101,

104-5, 164-5 printing-press method and system adopted, 105107 subscriptions on Treasury bills or war loan, 99-100, no, 163-4 peace-time, 161-2, 235 prices raised by, 86, 102, 103, 161, 175-6
;
174-5,177; "pegging" 184-5
American securities held in United Kingdom, 4041
Armament
Army,
firms and danger of war, 23-4, 27-8 cost of upkeep of, 4-8
Army
training
and industrial
economic
efficiency, 5
Asiatic possessions,
private, 79-80
value of, 20-21 Austria, financial position of, 162, 177
production discouraged by, 109-10

taxation performed by, 107108, 109, 159-60, 161 taxes and loans and, 79-80, 86, 108, 109 transference of real income
Bank credits, 92-111, 235 bank rate as check on,
102,
165, 166 bounties supplied by, 156, 159-60
by,
08
86, 92-
war finance by, 79,

iii
239
240
:
WAR
Bank of England
credit
creation
;
by,
95-9,
Cannan, Edwin, quoted, 141 material and imCapital, 83

;
100,109-10,163, 1 6472., 165 currency notes and, 106-7, J 64-5 drained by gold reserve
:
material, 215-17, 222-7 depletion of, as resource for war, 31, 38-42, 43,
73
special
Bank
Banks
creation, 102, 103, 104, 105, 165 ; settlement of, and fiduciary issue, 178-81 rate, increase of, a bar to credit expansion,
credit
levy and, 213, 214-15
204-6,
based on capital, 217-27, 231; administrative technique of, 222-6 of, 219-22 equity
; ;
102, 165, 166

:
productivity as affected
by, 217-19 taxes and loans, respective effects on, 73-9 Capital levy, 78, 204, 215-16
;
credit creation
by through Bank of England, 95-9,
no
currency notes, 101, 104105, 106-7, 164-5 subscription direct, 99100, 163-4 credit expansion by, checks to, 162-6 Black troops, recruitment of, 24 Bounties agriculture and, 12 doles and, 158-9 general, 155-7, 158 key industries and, 14 limited, 156, 157-8 price control modified by, 134-5 Bowley, Dr., quoted, 7
:
German, 207
Cattle
and sheep, price controlled, 119, 123
Channel tunnel
Charity
element
project, 9 in limited
bounties, 157, 159 Cheese, price controlled, 124, 140 Classification for purposes of price control, 119-29 conditions of production,
local,
;
;
seasonal,
etc.,
120-23 intermediate stages between
producer and consumer, 123-8
Bread
price controlled, 127, 140 ; subsidy on, 140,
raw materials and finished

articles, 128-9 schedules fixed, 121-2, 124125, 126-8
156
British
Government
com;
mandeering " by, 64, 65 " exchanges pegged

railway by, 184-5 control by, 236 U.S.A. credits to, 184, 1 86 war finance of, see War finance British West Africa, discriminating tariff in, 26 Brussels Financial Conference, 1920, 6 Butter, price controlled, 126
;
; ;
Coal: distribution controlled, 236 price regulated,

;
I2i, 123, 126, 135
Coal mines, commandeered, 65, 237 Cobden, his hopes from free trade, 29 Coercion and increase of production, 33
Commandeering,
governof anment, 63-70 nually produced goods,

;
INDEX
Commandeering
;
241
creation, credits
see
(contd).
Credit
Bank
of productive in64 struments and agents, 65-70 advantages of, 66-70 Committee on Currency and Foreign Exchanges,
Cunliffe Committee, recom-
mendation Currency
: ,
of,
175-6
178-80
Companies and corporations,

special levy and, 227 Competitive conditions, price control under, 138-40 Concession-hunting and ex-
pansionist policy, 21-3,
depreciation of 161-2, 162-4 de- valuation of, 169, 173-8 gold and, parity of, stabilisation necessary, 167-9 new and lower, establishment of, 169, 171-2, 173-8 pre-war, restoration of, 169, 173-7, 200-202
26-7 Conscription
purchasing power 170-73

;
parity,
:
industrial, 33, 66 military, 4-5, 65-6
pay
:
Currency notes, issue of bank credit creation and, 93,

101, 104-5, 164-5, 166 gold reserve and, 178-80 limit to, 94, 166, 179-80 withdrawal of, 175, 180
under, 7, 49 Consumption, personal reduction of, for war purposes, 31, 35, 42-3,48,
52, 73 choice of economies, 52-60 government action to stimulate, 59-62, 63.
Death
70
commandeering,
propaganda,
63-70;
duties, restrictions, 6062, 63 government's real needs
and duties, 218, 231 postponed special levy, 225 Defence effects of necessity for, 4-14; expenditure
; :
on, 6-8
Demand and
supply under
and, 5-, 53-7, 65 present ;-nd future as affected by, 42-3, 73

unreal, 48 rich and poor and, 137, 139 Co - operation, industrial,
rationing scheme, 143144, 146-7, 150 Depreciation of currency, 161162, 162-4 De- valuation of currency, 169,
173-8
under government control, 236-7 Corporations and companies, special levy and, 227-8
Diplomatic support of concession-hunting, 21-3, 26-7 Distribution of commodities under rationing system, 137-40, 144-8 by needs, 140-42 by uses, on pre-war 150-53 purchase basis, 153-4 Distribution of purchasing
; ;
;
Costs,
real
and
money
costs, 46-8, 68 ; and real expenditure, 51-2
Cotton Control Board, 153-4 Cotton goods, price con-
Coupons,
trolled, 128-9 ration, necessity for, 146
power government control of, 234-6

: ;
242
and,
WAR
:
Distribution (contd.) price limitation
118 Distribution of special levy,
Exchanges, foreign adjustment of, 168-80, 182188
bank
210-15
Distribution of taxes or loans,
credits and depreciation of, 102, 161
bank credits 80-84 and, 108 Diversion of resources not

;
addition, 36-7
Doles and bounties, 158-9 Domination, desire for, as cause of war, 16-18 Duties protective, and home
:
production, 12, 14, 89-
90
restrictive
of
private consumption, 60-61, 62, 63
Economic causes of war, 1628 armament interests,

;
currency and gold, parity of, and, 168-80 depreciation of, elements of, 169-73 fluctuations of, 166-8 regulation of, 168-80 imports and investments, control of, and, 182-8 " " " pegging " of, 184-5 proper rate, estimate of, i?3 Exchequer bonds, 87 Expenditure government, extravagance and real, 50-51, 208-10
;
:
23-4,27-8; concessionhunting, 21-3, 26-7 trade interests, 19-21,25 Economic factors of peace, 28-9
;
taxation for, and for interest, 199-200, 201,
209-10
private, 88-92
real
:
and money expendi-
Economy
:
personal, see Consumption, personal, reduced war government enforce-
ture, 48-51 ; and real costs, 51-2 v. quantity, as ratiqn basis,
ment
of,
59-62, 63-70
objects of, profitable and unprofitable, 5560 ; private duty in relation to, 57-60
148 government Extravagance, real expenditure and, 50-51, 208-10 special levy and, 207-10
; ;
of supply, price control and, 130-33 Electricity, regulation of use of, 151
Elasticity
Farmers, evasion of rationing by, 149 Fiduciary notes, issue of,

see Currency notes Finance of industry, special levy and, 206-7
Empire
and
Commerce
in
Africa (Woolf), 22 Engineering plant, commandeering of, 65, 67

Essential
and non-essential occupations, 66 Excess profits taxation, 116

;
United Kingdom, 133; United States, 114
of war, see War finance Financiers and expansionist policy, 21-3, 26-7 Firms, rationing of, 150, 151, 15.2. 153-4 Fish, price controlled, 124, 127-8, 140
INDEX
Floating debt and currency depreciation, 162-4 Flour or bread, price controlled, 127,
243
:
Gold
currency
167-9
and,
parity
of,
stabilisation necessary,
140
Flour mills
65
commandeered,
new and ment
lower, establishof, 169, 171-2,
Food
control, see Price control
and Rationing
Food supply of United Kingdom, war and, 10-12

Forced loan and depletion of
capital,
74-7
Foreign demand, commandeering cuts off, 66-7 Foreign exchanges, see Exchanges Foreign investments, control
of,
173-8 pre-war, restoration of, 169, 173-7, 200-202 export of prohibited, 103, 167 restoration of 169 purchasing power, parity of, and, 170, 171, 172, 173, 181 value of, fallen, 181, 200 Gold reserve drain on, 102,
:
103,
104,
;
105,
165,
91-2, 182-3,
187-
188
size of, in relation to note issue,
178
Foreign loans, during war, 4142, 73 Foreign purchasing power,

,
178-80
Gold standard
166-8
;
collapse of,
restoration
command
1
:
of,
183-4,
;
essential, 178-81
France
86-8 currency of, 177 defence expenditure of,
Government commandeering by, 63-70

:
; ;
7,8
Free trade and peace, 25, 29 Future and present
:
special levy and distribution between, 210-11 taxes or loans, finance by,
and, 73-9, 82 war funds, provision of, as affecting, 42-4, 73,
advantages of, 66-70 annually produced goods, 64 productive instruments and agents, 65-70 real, not expenditure of 50-51, extravagance taxation for, 208-10
;
:
79
Gain
as a
motive for war, 16,

:
18-28
Germany
capital
;
levy
;
in,
207
defence expendi;
ture of, 7, 8 desire for domination in, 17 issue fiduciary note financial posir in, 94 tion of, 162, 177 ; rationing evasions in,
;
interest, 199200, 20 1, 209-10 real exextravagance of penditure and, 50-51, 208-10 special levy and, 207-10 food control by, see Price control and Rationing industrial control by, 233: ;
and for
237
price control by, see Price control
149
requirements of, and personal economies, 52, 53-7, 65
R2
244
Income
WAR
;
Government (contd.) war economy, enforcement comof, by, 59-62

;
(contd.)
special levy based on, 217-
mandeering, propaganda,
restrictions,
63
70
duties, 60 - 62,
227, 231 equity of, 219-22, 229-30 productivity as affected by,

;
217-19
taxes
63 Granaries, national, 11-12 investment Great War, the abroad restricted during, 92, 182-3, 187-8
:
and
loans,
tive
effects
respecon, 73-9,
labour, demand for, merchant during, 35 shipping in, 9 private

; ;
85 Income-tax, 219, 220, 221-2, 227, 229, 230 inequity of, 216-17, 220
expenditure during, 91
;
restricted
;
tions in force
151 ferred to France in, 38 rationing during, see taxes and Rationing loans during, 85, 86, women's 87, 88, 92
; ; ;
prohibiduring, railways trans-
machinery of, special levy and, 224 national debt and, 193 production checked by
high, 195-6, 202-3
Indemnity, war, 18-19 Index numbers, English and American, 172

India, discriminating tariff in,
26
n.
Industrial transition, govern-
work
in,
36-7
ment coercion and, 6870

Industries
:
"
key,"
13-14
Horse and poultry mixture,

price controlled, 125
munition-making and,
12-13 Industry friction
:
Hours of labour, productive and unproductive, 32,

43 House-building for labourers
subsidised, 157
in
in, on fall wages and prices, 176; government con-
Imperialism, policy of,
and
mili233-7 and, 4, 5 special levy and, 204-6 " Inflation," currency, 93-5
trol
of,
;
tary
;
service
commercial
19
-
interests,
Interest
on government
loans,
concession hunting and, 21-3, 2627 Imports, control of, 182-3, 187
2i
;
Income
currency fluctuations and, 201
money, United Kingdom, 6 real and money, under incr eased production,
199-200
86-7 Interim Report of the Committee on Currency and Foreign Exchanges, 96, 103, 105 Internal debt, 189-90; special levy to wipe off, see Special levy International agreements desirable
against discriminating
tariffs,
25
diplomatic
INDEX
International agreements
(contd.)
245
economy on, 56, 57, 91, 234 expenditure on, and shortage of essentials, 233-4
: ;
Luxuries
support of concessionhunting, 27 for nationalisation of armament firms, 28 general economic, 29 International postal convention, 29 Investment, 132
Machine
tools, price trolled, 120

of,
con-
Mandates, theory
Maximum
27
',
foreign, control of, 92, 182183, 187-8 reduction of, for war pur-
116-35 prices, bounties to cancel, 1 34135; classification for,
31,42,73 United Kingdom, 37-8 Irish Labourers Act, 157

poses,
Italy
:
currency of, 177 fence expenditure

"
deof, 8
"
119-29 competition and, 138-40; elasticity of supply and, 130133 ; local authorities and, 126-7, 128 monopoly and, 137-8 production as affected by, com129-35 rationing
;
>
Key
industries, 13-14
plementary to, 136, schedules of, 137

;
Labour supply and demand

during war, 33-4
League of Nations, 25, 27, 29 Leather, price controlled, 125

Loans
:
121-2, 124-5, 126-8 price controlled, 125 rationed, 148, 149 Members of Parliament, payment of, 50, 51
Meat
Merchant shipping comman:
depletion of capital, 74-7 foreign, during war, 41 -2, 73 in aid of rationing, 143 taxes versus, 71-85, 109 both necessary, 72-3 ; credit creation and,
forced,
;
and
deered, 65, 66
defence requirements and, 8-9

;
Military service and industry,

4, 5
79-80; distribution
duration and, 80-84 of war and, 84- 5 ; and future, inpresent
I
Milk, price controlled, 121, 122, 128 Money, Sir L. Chiozza,quoted, 233
Money
Money
costs
and
real costs,
46-8, 68
come and
capital,
as
expenditure and real expenditure, 48-51, 68

:
affected by, 73-9, 109 voluntary, technique of, 86interest offered, 92 86-7, 95; negative
;
and real income, 199-200; of United Kingdom, 6 Monopoly danger of, from
Money income
:
stimulation,
88-92
;
industrial
;
co
opera-
propaganda, 88 of appeal, 87
range
tion, 237 price restriction and, 137-8
Local authorities and price control, 126-7, 128
Most favoured nation

24-5
clause,
246
"
co-operade236-7 mand for labour in, hours of labour 35 industries in in, 32 relation to, 12-13, 14
:
WAR
Munition-making
tion
;
in,
Museums and
galleries, clos-
ing of, unreal economy, 56-7 National debt, 189-90 interest on, 193, 197-8
;
redemption
of
by
special levy, see Special reduction of, levy ;
of exchanges, 184-5 Personal economy, see Consumption, personal, reduction of Personal relative services, value of, 54-5 Petrol, use of, regulated, 151 Poor bounties on consumption of, 156-9 credit creation and, 108, 159 excess profits plan and, 117
Pegging
"
and
rich
as
affected
by
190-91 National dividend 30-31, 39 National expenditure, defence, 6-8 Nationalisation, 237 Navigation laws, 8 Neutral opinion, devices to impress, 87, 95, in Nigeria, discriminating tariff in, 26 n. Non-essential and essential occupations, 66
,
bank
credits, 108, 109,
159 ; duties on consumption, 6 1-2; ration136-7, 139, 140, taxes and loans, 145 81-2, 84 Potatoes price controlled, sub126-7, 128, 140 sidy on, 155 Present and future special levy and distribution between, 210-11 taxes or loans, finance by, and, 73-9, 82 war funds, provision of, as affecting, 42-4, 73,
ing,
;
:
Paper, regulation of use of,

151, 154 Paper currency,
see
79
Currency
notes Parity of currency and gold, 167-9 new and lower, 169, 171172, 173-8 pre-war, 169, 173-7, 200-
Price control, 112-35 bounties to modify, 134-5
commandeering
to,
essential
of
202 gold
and purchasing power, 170, 171, 172,
67-8 competition and, 138-40 classification of commodities for purposes of, 119-29 conditions of production,
local,
seasonal,
etc.,
173, 181 Patriotism and
increase of production, 33 Payment of Members of Par-
120-23 intermediate stages between producer and consumer, 123-8
Peace
liament, 50, 51 economic factors of, free trade and, 28-9

;
raw materials and finished

articles, 128-9 schedules for, 121-2, 124125, 126-8
25,29
INDEX
Price control (contd,)
elasticity
247
(contd.}
Production
and,
of 130-33
supply
local authorities and, 126127, 128
price control and, 129-35 prices and, 199 shadow of war and, 4-6
special levy and, 195-6, 200,
monopoly and, 137-8

production and, 129-35
rationing complementary to, 136, 137, 139, 140, 142-3 Prices bounties in control of, 155:
202-3, 204-7, 217-19,
231
taxation, high, a check to, 105-6, 202-3 transition from peace to
war, 68-70
Profiteering,! 1 2- 1 14;
methods
160
control of, see Price control credit creation and rise of,
86, 102, 103, 161, 175-
176 currency movements and, 201-2 exchange fluctuations and, 169-77 future level of, 180-81 gold standard restoration and, 1 80-8 1 guaranteed, 12, 14
of restricting, 68, 115ii 8, 130, and see Price control for war ecoPropaganda nomy, 60, 63 for war
:
loans, 88
Protective
and
:
tariffs
preferential agriculture
;
and,
08
discrimina-
tion in British possessions, 25-6 ; expansionist policy and, 19-
maximum,
prices
see
Maximum
21,25 most favoured nation clause, 24-5

;
Purchasing power
production and, 199 reduction of, devices for, 174-81 taxes and loans and, 79, 86 Priority certificates ,64,91,151 Private duty as to war ecoindivinomy, 57-8 dual and group, 58-60
;
European and American,

foreign, command of, 183184, 186-8 government control of, 234-
during war, 185-6
236
parity of gold and, 170, 171, 172, 173, 181 special levy as transfer of,
Private expenditure, restrictions on, 88-92 Production, Productivity augmentation of, for war
:
205
purposes, 31-5, 42, diversion of re43 sources distinct from, 36-7 future, 198-200 imposts on capital and, 217;
Railways defence requirements and, 9

:
219 instruments and agents
of,
commandeering
65-70
of, 64,
of, 65, 236, 237 material from, transferred to France, 38 Ration books, necessity for, 146 Rationing of consumers, 61, 64, 136-49
government control
248
Rich
(contd.)
WAR
Rationing (contd.) basis of distribution of commodities under, 137140, 144-8 expenditure v. quantity, 148 needs, 140-42 prewar purchase, I53~4 J uses, 150-53 demand and supply under, 143-4, 146-7, 150 evasions of, 148-9 firms and, 150, 151, 152, '53-4 price control and, 136-7, 139, 142-3 rich and poor under, 136-7, 139, 140, 145 size of ration, 142-3 States and, 143 surplus distribution under, 144-7 Raw Cocoa Order, 119 Real costs and money costs, and real ex46-8, 68 penditure, 51-2 Real expenditure and money expenditure, 48-51 and real costs, 51-2 Reconstruction, government control and, 234, 235 Recruitment of black troops, 24 Regulation of prices, see Price
; ; ;
.
and poor as affected by bank credits, 108, 109, duties on con159

;
sumption, 6 i -2
ra-
tioning, 136-7, 139, 140, 145 ; taxes and loans, 81-2, 84
Securities
as capital, 40-41 special levy payable in, 206:
valuation 232 224 caused Shortages by war, 112207,

;
for,
H3
Sick clubs, 158 Sinking fund, 190
pay of, and real expenditure, 34, 49-50 Special levy in redemption of debt, 190-91, 192-3, 196, 202-32 amount to be yielded by, 23 2 basis of assessment of, 212, 215-27, 231 capital or income, 217administra227, 231 tive technique, 222226 equity, 219-22 productivity, 217-19; valuation difficulties,
Soldiers,
; ; ;
control
capital
;
Resources available for war, 30-44, 46, 73 aug-
224-7 and, 204-6, 213, 214-15, and see preced-
ing entry
mented production, 3135, 36-7, 42, 43

;
companies
and
,
corpora-
de-
pletion of capital, 31,
38-42,43,73
;
reduced
tions and, 227 distribution of 210-15, 228231, and see basis of
investment, 31, 37-8, reduced per42, 73 sonal consumption, 31, 35, 42-3, 48, 52-70, 73 Restrictions on purchase, 6061, 63, 88-91 Rich loans preferred to taxes by, 76, 78, 82 ; war charges and, 82, 84
.
assessment
between
;
different people, 211-
between 215, 228-31 present and future, 210-11 government extravagance and, 207-10 graduation difficulties, 229231
INDEX
Special levy (contd.)
249
(contd.)
Taxation
;
payment
of by ments, 205-6
:
instalin se-
as
191, 193-202, 209-10; affecting future,
curities, 206-7, 224, 232 productivity and, 195-6, 200, 202-3, 204-7, 217-
196-202, 207-10
Taxes
219,231
range
of,
227-8
repetition of, fear of, 203-4 taxation, future, as affected by, 193-202, 207-10
war loan and, 206-7, 214"
versus loans, 71-85, both necessary, 109 72-3 ; credit creation distribuand, 79-80 tion and, 80-84 J duration of war and, 84-5 present and future,
; ; ;
income
as
and
capital,
Standard
215, " 232

articles,
affected
by, 73-9,
128-9
109
States, rationing and, 143
Stoppages of work, war and, 35 Straits Settlements, discriminating tariff in, 26 n. Subsidies, 140, 155-60, see
Bounties
"
Territorial acquisitions,
reasons for, 17 - 18 concession - hunting,
;
21-3, 26-7
recruit-
Tank weeks," 88
:
Tariffs, protective and preferential agriculture and, 1 08 discrimination in British possessions, 25;
troops, 24 ; trade, 19-21, 25 price controlled, 64, 124; use of, regulated, 151 Trade.and expansionist policy, 19-21, 25 Transference of resources:
ment of
:
Timber
by bank credits, 108 by bounties, 157 real

; ;
26; expansionist policy most and, 19-21, 25 favoured nation clause, 24-5 Taxation
; :
expenditure
51
and,
49,
Transport, and, 8-io
shadow of war
87
;
Treasury
bills,
bank
bank
credits a
form
of, 107-
108, 109, 159-60, 161 as coercion to work, 33 currency fluctuations and,
credits raised by, 99, 100, no, 163-4 > renewal of, to check credit creation, 163-4,
201-2
future prospects of, 196202, 207-10 general principle of, 71, 76, 83, in, 218-21, 229-30
evil effects of, 236 production and, 195196, 202-3 inequities of, 212-13, 219221
165
Triumph of Nationalisation, The (Money), 233
high
Unemployment reduced by
war, 34, 35
United Kingdom American securities

:
held
in,
40-41
special levy versus, in re-
capital, national,
39
in, 65,
demption of debt, 190
commandeering
66
250
War
(contd.)
WAR
concession-
United Kingdom (contd.) currency note issue limit in, 1 66 debt to U.S. A. of, 192
defence expenditure
of, 6-
causes of (contd.)
27-8;
7,8
food
supply
of,
need of
assuring, 10-12
imports
of, and for, 182-3
payments
6
;
hunting, 21-3, 26-7 ; trade interests, 19-21, 25 costs and expenditure, real and money, 4552 internal debt and, 189
:
income, money, of, average pre-war, 7
investments, home and

foreign, of, 37-8 ; restricted, 92, 183, 187-8 national debt of, 189, 190 ; interest on, 197-8 ; internally
debt, payment of, and distribution between present and future, 210-11
economy
government en;
192
owed, 189, redemption of,
see Special levy parity, pre-war, desirable in, 177
forcement of, 59-62, 63 - 70 objects of, profitable and unprofitable, 55-60 private duty in relation to, 5760
;
finance
by bank
235,
92-111,
and
;
credits, see
United States of America banking system of, 181

186
Bank
credits
by
;
credits to Allies from, 184,
loans or taxes, 71-85, 109, and see Loans by voluntary loans, 8692,
exchange
peg174 "5, i?7 of, 184-5 ging flow of, into, 103 gold, United Kingdom's debt to, 192
;
excess profits tax in, 114 with adjustment of, 167, 169-73, "
:
and see Loans
Great, see Great War resources available for, 3044, 46, 73 ; augmented production, 31-5, 3637, 42, 43 depletion of capital, 31, 38-42, reduced in43, 73 ; vestment, 31, 37-8,42, 73 ; reduced personal
;
Valuation for 224-7
special
levy,
shadow
consumption, 31, 35, 42-3, 48, 52-70, 73 of, 4-15, 24 agriculture and, 10 - 12
; ; ;
Wages and
prices, 108, 161 ; friction resulting from

fall in,
176
War:
causes of, 16-28 domination, 16-18 armagain, 1 6, 18-19 ment interests, 23-4,
;
defence requirements, industries and, 4-14 12-14 transport and, 8-10 shortages caused by, 112-13 War loan special levy and, 206-7, 214-15, 232
; : ;
United Kingdom, 194,

197
INDEX
War War
profits,
251
nating
tariff in,
112-15, 130; methods of restricting,

68, 115-18, 130
West Africa, British, discrimi26
Wheat
commandeered, 10;
savings certificates, 87,

;
12
215 real Waste, governmental expenditure and, 5051,
of, ii -12
;
national granaries ; subsidy on,
United 155 dom's supply

12
Kingof,
10-
208-10;
96-9,
163
special
levy and, 207-10
Women's work
36-7
109,
in war-time,
Ways and Means, advances

on,
101,
Wool commandeered, 64
Woolf, L.
S.,
no,
22
THE END
Printed by R.
&
R. CLARK, LIMITED, Edinburgh.
IP ou
THE UNIVERSITY OF CALIFORNIA LIBRARY

Political Economy of War

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Political Economy of War

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THE POLITICAL ECONOMY OF WAR

BOMBAY CALCUTTA MELBOURNE

THE MACMILLAN COMPANY

MARTIN'S STREET, LONDON

book use has been

and of other publications, including a memorandum

some passages from

book, The Economy and

Finance of the War, published by them in 1916.

THE SHADOW CAST

COSTS AND EXPENDITURE

THE CHOICE AMONG PERSONAL ECONOMIES

THE TECHNIQUE OF VOLUNTARY LOANS

AND THE RATIONING OF FIRMS

CURRENCY AND EXCHANGES

THE AFTERMATH OF INTERNAL DEBT

persons regularly clothed, fed.

directly furnishing his

each person or family needs, but by an extrasystem of mutual exchange

settled order, the strained

against the cool rhythm of a and stressed economy

Economy we have read

companion volume, the Economy of War. Some pages of this I

practical affairs, the Political

THE SHADOW CAST BY WAR

and policy of normal times

other with the influence which the

THE SHADOW CAST BY WAR

the arrangements sometimes

for reducing the

19 to 21 years of age makes

in industry. Two years of military a man a better carpenter than he

would otherwise have resulted from

voluntary, so that the pay for sailors and

THE SHADOW CAST BY WAR

need there may be for new accumulations of capital

the Product of Industry, p. 58.

than in the United

Kingdom and the

large supply of British merchant convertible at need into fighting ships.

of these objects even

they should be so built as to be capable of con-

THE SHADOW CAST BY WAR

With the Great

resources from other industries into the shipping

by a number of important railway was determined with regard to the need of

of espionage over fortified places.

the situation of aerodromes, they will not

hostile air attack.

at are likely to injure the

the claims of defence had been silent.

especially important to the United shadow that possible future war

of our wheat are obtained

THE SHADOW CAST BY WAR

are engaged in industrial, work. Where there is a

not practicable at short notice

was wanted would be taken out

one end and new

supplies poured in at the other.

for the government,

by bounties, guarandeliberately to divert

would involve an enormously

and in war they would be

directly serviceable for